Chapter 3 Organizational Resources and Competitive Advantage 1

2 Learning Objectives To understand: the characteristics of resources and capabilities that create a foundation for sustainable competitive advantage how human resources, physical resources, financial resources, knowledge and learning resources and general organizational resources can lead to competitive advantage how resources are interconnected and the implications of resource interconnectedness for competitive advantage the usefulness of the value chain in understanding sources of competitive advantage traditional and stakeholder-based measures of firm performance To understand: the characteristics of resources and capabilities that create a foundation for sustainable competitive advantage how human resources, physical resources, financial resources, knowledge and learning resources and general organizational resources can lead to competitive advantage how resources are interconnected and the implications of resource interconnectedness for competitive advantage the usefulness of the value chain in understanding sources of competitive advantage traditional and stakeholder-based measures of firm performance

3 StrategicDirection Strategy Formulation (corporate and business level) Strategy Implementation and Control Strategic Restructuring External and Internal Analysis Strategic Management Process

4 Organizational Resources Leading to Sustainable Competitive Advantage Organizational Resources and Capabilities Financial Physical Human Knowledge & Learning Organizational Valuable? Unique? Potential for Competitive Advantage Appropriate systems in place? Managers taking advantage of potential? Realized Competitive Advantage Difficult or costly to imitate? No readily available substitute? Sustainable Competitive Advantage

5 Organizational Resource Interconnectedness Human Resources Knowledge and Learning Resources General Organizational Resources Physical Resources Financial Resources

6 Human Resources Employees – recruitment, training programs, rewards system Managers – CEO and top management team Owners/board of directors – effective corporate governance Employees – recruitment, training programs, rewards system Managers – CEO and top management team Owners/board of directors – effective corporate governance

7 Physical Resources Tangible resources such as machinery, plants and products – easy to imitate, but the processes to create them are not Locations – competitive clusters can provide advantages to companies and consumers Tangible resources such as machinery, plants and products – easy to imitate, but the processes to create them are not Locations – competitive clusters can provide advantages to companies and consumers

8 Financial Resources Strong cash flow, low levels of debt, strong credit rating, access to low interest capital and reputation for creditworthiness can increase strategic flexibility – more responsive to new opportunities

9 Use of Financial Analysis in Strategic Management Identify strengths and weaknesses Diagnose problems Declining profitability Insufficient liquidity Leverage too high or too low Internal mismanagement Essential comparisons Firm to competitors Firm to itself over time Identify strengths and weaknesses Diagnose problems Declining profitability Insufficient liquidity Leverage too high or too low Internal mismanagement Essential comparisons Firm to competitors Firm to itself over time

10 Some Commonly Used Ratios Profitability Gross Profit Margin Net Profit Margin ROA ROE Liquidity Current Quick Leverage Debt to Equity Total Debt to Total Assets (Asset Ratio) Activity Asset TurnoverAverage Collection Period Accounts Receivable TurnoverInventory Turnover Profitability Gross Profit Margin Net Profit Margin ROA ROE Liquidity Current Quick Leverage Debt to Equity Total Debt to Total Assets (Asset Ratio) Activity Asset TurnoverAverage Collection Period Accounts Receivable TurnoverInventory Turnover

11 Knowledge and Learning Resources Organizational learning leads to strengths in other resource areas. It involves: Knowledge creation Knowledge retention Knowledge sharing Knowledge utilization Two types of knowledge: Codified – can be communicated with precision through written means. Typically not a good source of sustainable competitive advantage Tacit – difficult to describe with words. Better source of sustainable competitive advantage Organizational learning leads to strengths in other resource areas. It involves: Knowledge creation Knowledge retention Knowledge sharing Knowledge utilization Two types of knowledge: Codified – can be communicated with precision through written means. Typically not a good source of sustainable competitive advantage Tacit – difficult to describe with words. Better source of sustainable competitive advantage

12 General Organizational Resources Some general organizational resources are hard to imitate and are therefore excellent sources of sustainable competitive advantage: Organizational reputation Corporate brands Unique configurations of stakeholder relationships – joint venture, long-term contracts and other types of partnerships and alliances Organizational structure and internal systems Organizational culture Some general organizational resources are hard to imitate and are therefore excellent sources of sustainable competitive advantage: Organizational reputation Corporate brands Unique configurations of stakeholder relationships – joint venture, long-term contracts and other types of partnerships and alliances Organizational structure and internal systems Organizational culture

13 Value Chain Activities Supply Chain Management Internal Operations Management Distribution and Location Management Marketing Management Management of Post- Transaction Contacts Basic Value Chain Activities Activities that Support the Basic Value Chain Activities Product/service R&D Consumer research Financial management/accounting Information technology (IT) Human resources/compensation systemsLegal support Strategic planning processes

Firm Performance Traditionally performance measured as financial performance (ROA, ROE, shareholder returns)Traditionally performance measured as financial performance (ROA, ROE, shareholder returns) ›Short-term mentality ›Externalities Activities of the firm provide value to a broad spectrum of stakeholdersActivities of the firm provide value to a broad spectrum of stakeholders ›Need a more balanced and complete set of measures ›Reflect more of the value a firm creates for its stakeholders 14

Examples of Stakeholder-Based Performance Measures EmployeesEmployees ›Surveys of employee happiness ›Turnover CustomersCustomers ›Growth in sales ›Surveys of customer satisfaction SuppliersSuppliers ›Longevity of supplier relationships ›Existence or absence of supplier-led legal actions ShareholdersShareholders ›Shareholder returns ›Risk associated with returns CommunityCommunity ›Inclusion on list of socially responsible firms ›Percent of income donated to community or social causes 15