1. Exploring Corporate Strategy 7th Edition
Part II
The Strategic
Position

2. Exploring Corporate Strategy 7th Edition
Chapter 3
Strategic Capability

3. 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

4. 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

5. 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

6. 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

7. Strategic Capabilities and Competitive Advantage
Exhibit 3.1

8. 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”

9. Strategic Capability- the terminology
Exhibit 3.2

10. 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

11. 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

12. 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

13. 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

14. 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

15. Sources of Cost Efficiency
Exhibit 3.3

16. The Experience Curve
Exhibit 3.4

17. 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

18. 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

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

20. 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

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

22. 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

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

24. 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

25. 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

26. 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

27. The Value Chain Exhibit 3.6
Source: M.E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 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

28. 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

29. 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

30. The Value Network Exhibit 3.7
Source: M.E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 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

31. 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

32. 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

33. 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?

34. An Activity Map
Exhibit 3.8

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

36. 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

37. 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

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

39. 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

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

41. 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

42. 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