© 2013 Cengage Learning. All rights reserved. CHAPTER 4 © The Studio Dog/Photodisc/Jupiterimages GLOBAL2 t PENG © 2013 Cengage Learning. All rights reserved.

© 2013 Cengage Learning. All rights reserved. Opening Vignette Describe Saturna Capital Where is it located? How many employees? Describe the opportunity sought by Nicholas Kaiser What are some investment restrictions for Saturna Capital? Explain Saturna’s remarkable success © 2013 Cengage Learning. All rights reserved.

CHAPTER 4 LEARNING OBJECTIVES After studying this chapter, you should be able to: Define resources and capabilities. Explain how value is created from a firm’s resources and capabilities. Articulate the difference between keeping an activity in-house and outsourcing it. Explain what a VRIO framework is. Explain how to use a VRIO framework to understand a firm’s resources and capabilities. Identify three things you need to do (and one thing you should avoid) as part of a successful career and business strategy. © 2013 Cengage Learning. All rights reserved.

© 2013 Cengage Learning. All rights reserved. SWOT ANALYSIS Strengths and Weaknesses – internal assessment of the organization leading to management decisions. Opportunities and Threats – external assessment of the business environment to identify the uncontrollable events that might impact management decisions. © iStockphoto.com/photovideostock © 2013 Cengage Learning. All rights reserved.

What is SWOT Analysis? The SWOT Analysis is an important strategic tool. It helps companies make sound strategic decisions by looking at their controllable/internal environment, look at the external/uncontrollable environment.

Internal vs. External Environments In analyzing a company’s current strategic position, it is important to look at what the company has control of (the internal environment), and what it does not have control of (the external environment).

The Internal Environment The Internal Environment of a company includes the things the company can control. These are the Strengths and Weaknesses. When you look at the these, look not only from the company’s point of view, but also from the point of view of outsiders. Be realistic in your assessment.

Strengths Your strengths should cover: What do you do well? What advantages do you have? What resources do you have access to? What do others see as your strengths? This is a good starting point, but not a limiting point in your analysis of strengths.

Weaknesses Your weaknesses should cover: What do you do badly? What are things that need improvement? What do you do that you should avoid? Again, this is a good starting point, but try to look beyond these questions in analyzing weaknesses.

The External Environment The External Environment is everything that is outside of the company’s control. These are the Opportunities and Threats. Legal Political Social Economic Technological Global Competitive environmental

Opportunities & Threats Opportunities- What elements of the external environment could benefit the company? Threats- What elements of the external environment could hurt to the company?

What Next? Now that you have identified the company’s Strengths, Weaknesses, Opportunities, and Threats, it’s time to put them together and understand what they mean.

Leverage Leverage is when a strength allows you to take advantage of an opportunity. LEVERAGE External (Uncontrollable) Internal (Controllable) Strengths Opportunities Weakness Threats

Constraint Constraint is when a weakness prevents you from taking advantage of an opportunity. External (Uncontrollable) Internal (Controllable) Strengths Opportunities CONSTRAINT Weakness Threats

Vulnerability Vulnerability is when a threat attacks a strength. External (Uncontrollable) Internal (Controllable) Strengths Opportunities VULNERABILITY Weakness Threats

Problem Problem is when a threat attacks a weakness. Strengths External (Uncontrollable) Internal (Controllable) Strengths Opportunities Weakness Threats PROBLEM

Strengths SWOT Analysis Opportunities Weakness Threats External (Uncontrollable) Internal (Controllable) LEVERAGE Strengths Opportunities CONSTRAINT VULNERABILITY Weakness Threats PROBLEM

SWOT Analysis Once you have identified the Leverages, Constraints, Vulnerabilities, and Problems facing the company, you can make recommendations for the company to move forward and improve its market position.

LO1: RESOURCES AND CAPABILITIES The tangible and intangible assets a firm uses to choose and implement its strategies. © 2013 Cengage Learning. All rights reserved.

LO2: THE CREATION OF VALUE Q How do resources and capabilities come together to add value? Value is created through a series of activities, the value chain. A © 2013 Cengage Learning. All rights reserved.

LO2: THE VALUE CHAIN Note: Dashed lines represent firm boundaries. The value chain consists of steps in the process of turning inputs to outputs. Value is added at each stage of the chain, from development to marketing. Each activity in the chain requires a number of resources and capabilities. Value chain analysis forces managers to think about resources and capabilities at a very micro, activity-based level. Note: Dashed lines represent firm boundaries. © 2013 Cengage Learning. All rights reserved.

LO2: THE VALUE CHAIN Note: Dashed lines represent firm boundaries. © 2013 Cengage Learning. All rights reserved.

© 2010 Cengage Learning. All rights reserved. Dell’s Value Chain © 2010 Cengage Learning. All rights reserved.

Benchmarking

LO2: TWO-STAGE DECISION MODEL Benchmarking – Given that no firm is likely to have enough resources and capabilities to be good at all primary and support activities, the key is to examine whether the firm has resources and capabilities to perform a particular activity in a manner superior to competitors. If managers find that a particular activity performed by their firm is unfavorable, a two-stage decision model can remedy the situation. © 2013 Cengage Learning. All rights reserved.

LO3: IN-HOUSE OR OUTSOURCE? Outsourcing – the turning over of an organizational activity to an outside supplier that will perform the activity on behalf of the focal firm. The answer to the question “Do we really need to perform this activity in-house?” comes down to two factors: whether an activity is industry-specific and whether it is proprietary. For example, there is little need to keep an activity proprietary if it has commonality across the industry. As a product loses its ability to command high prices and high margins through market competition, it undergoes a process known as commoditization. Note: Dashed lines represent firm boundaries. © 2013 Cengage Learning. All rights reserved.

LO3: IN-HOUSE OR OUTSOURCE? Factors to consider: Is an activity industry specific? Is an activity proprietary? Commoditization Some activities have generic attributes Cost of operating multiple stages of value chain © 2013 Cengage Learning. All rights reserved.

LO3: LOCATION, LOCATION, LOCATION There is some amount of confusion around “outsourcing” and “offshoring.” The table above minimizes the confusion by expanding to four terms based on location: Offshoring – international/foreign outsourcing. Inshoring – domestic outsourcing. Captive sourcing – setting up subsidiaries abroad. Domestic in-house activity. Offshoring and inshoring are international and domestic variants of outsourcing, while captive sourcing is conceptually identical to foreign direct investment (FDI). A lesson to take away from this table is that value-adding activities may be geographically dispersed around the world, even for a single firm, to take advantage of the best locations and modes to perform certain activities. Note: “Captive sourcing” is a new term that is conceptually identical to “foreign direct investment” (FDI), a term widely used in global business. See Chapter 6 for details. © 2013 Cengage Learning. All rights reserved.

© 2013 Cengage Learning. All rights reserved. LO4: VRIO FRAMEWORK alue – do firm resources and capabilities add value? arity – how rare are the resources and capabilities? rganizational – valuable, rare, and hard to imitate resources must be well organized. mitability – valuable and rare resources provide competitive advantage only if they are rare. © iStockphoto.com/photovideostock © 2013 Cengage Learning. All rights reserved.

LO5: VRIO FRAMEWORK AND FIRM PERFORMANCE Overall, only valuable, rare, and hard-to-imitate resources and capabilities that are organizationally embedded and exploited can possibly lead to persistently above-average performance. Because resources and capabilities cannot be evaluated in isolation, the VRIO framework presents four interconnected and increasingly difficult hurdles for them to become a source of sustainable competitive advantage. Sources: J. Barney, Gaining and Sustaining Competitive Advantage, 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 2002) 173; R. Hoskisson, M. Hitt, and R. D. Ireland, Competing for Advantage (Cincinnati: Thomson South-Western, 2004) 118. © 2013 Cengage Learning. All rights reserved.

© 2013 Cengage Learning. All rights reserved. LO5: VALUE Only value-adding resources provide competitive advantage. Non-value-adding resources may lead to competitive disadvantage. © 2013 Cengage Learning. All rights reserved.

© 2010 Cengage Learning. All rights reserved. LO5: RARITY © 2010 Cengage Learning. All rights reserved.

© 2013 Cengage Learning. All rights reserved. LO5: IMITABILITY Imitation is difficult because of causal ambiguity, which means the difficulty of identifying the actual cause of a firm’s success. Outsiders usually have a hard time understanding what a firm does inside its boundaries. Additionally, even managers of a firm often do not know exactly what contributes to their success. Imitation is difficult because of causal ambiguity, which means the difficulty of identifying the actual cause of a firm’s success. Outsiders usually have a hard time understanding what a firm does inside its boundaries. Additionally, even managers of a firm often do not know exactly what contributes to their success. © 2013 Cengage Learning. All rights reserved.

© 2010 Cengage Learning. All rights reserved. LO5: ORGANIZATION ORGANIZATION Complementary assets Social complexity Complementary assets refers to the combination of resources that go into producing an advantage for a firm. It may be that not just a few resources and capabilities enable a firm to gain a competitive advantage, but that literally thousands of these organizational attributes, bundled together, generate advantage. Social complexity refers to refers to the intricate and interdependent ways that firms are typically organized. How multinationals, which have thousands of employees scattered all over the world, overcome cultural differences and achieve organizational goals is complex. If is often the invisible relationships among employees around the world that add value. © 2010 Cengage Learning. All rights reserved.

LO6: THINGS TO DO FOR SUCCESS © 2013 Cengage Learning. All rights reserved.

© 2013 Cengage Learning. All rights reserved. DEBATE: OFFSHORING Value for firms in access to low-cost, high quality labor. Allows firms to focus on their core capabilities. Offshoring nurtures rivals. Negative impact on developed economies. US firms not bound by American ethical values. © 2013 Cengage Learning. All rights reserved.

McKinsey Global Institute on Outsourcing #1 Consulting Firm in the world Diana Farrell, Director of FGI Outsourcing Outsourcing in the “news” © 2010 Cengage Learning. All rights reserved.