INTRODUCTION: Strategizing Around the Globe: Industry and Resources

Pedro Coelhoso Class 2

Thought for the Day



Business is risky, and business people receive signals but not complete information. People read signals differently and so act differently even where their goals are identical.

-Stephen H. Hymer

Outline for Today

Discuss SWOT understanding Analyzing Industry Competition  Economic Justification for Expanding Scope Across Geographic Markets   Industry Analysis – Making a choice Competing Using Resources   Main Points for Today.

Set-up for tomorrow (Dec 15, 2009)

Applying Perspectives on International Strategy

These impact how firms behave.

Industry-based Competition Acquisitions/Restructuring Global Competitive Dynamics Entering Foreign Mkts Country Selection Local Competition Locating activities across countries

Structure

Strategic Decisions Firm-specific Resources & capabilities Institutional Conditions: - Formal - Informal

International Strategy

Implementation/ Performance Learning/Alliances

(Strategy is) Value Creation*

A Buyer’s Maximum Willingness To Pay

Consumer Surplus Business Unit’s Profit Production Cost

Per Unit of Product Or Service V: Value to Customer V - P P: Price per unit P - C C: Cost per unit C

Introduction to Intl Strategy

  Economic Justification for Expanding Scope Across Geographic Markets    Heterogeneity Scale Volatility Implications

Geographic Diversification and Firm Performance

Source: Adapted from F. Contractor, S. K. Kundu, & C.-C. Hsu, 2003, A three stage theory of international expansion: The link between multinationality and performance in the service sector (p. 7),

Journal of International Business Studies,

34: 5 –18.

Figure 9.2

Ownership Test and Market Failure

 Pro-Market (ie. Use contracts )   Market prices as incentives Market prices as information sources  Market Failures and Distortions (i.e. Inside )    Time lags Costly negotiating Knowledge: pricing and applications   Institutional pricing distortions Leverage market power

Sources of Opportunities and Threats in the General Environment

      Demographic changes .

Economic changes .

Political and Legal changes .

Sociocultural (attitudes and values) changes .

Technological changes .

Global and Globalization changes .

Industry Analysis

Suppliers

Bargaining power of suppliers

Potential Entrants

Threat of new entrants

Industry competitors Rivalry among existing firms

Bargaining power of buyers Threat of substitute products or services

Buyers Complementors

* Competitive Strategy Michael Porter, 1980

Substitutes

Five Forces Framework: Intensity of Competitor Rivalry

 Warning signs of a high degree of rivalry:  frequent price wars  proliferation of new products  intense advertising campaigns  high cost competitive actions and reactions

Competing on Resources

 Focus of the industry-based view:  How “average” firms within an industry compete.

 Focus of the resource-based view:  How individual firms differ from each other within an industry and can outperform the industry average consistently and significantly.

Competing Using Resources: Generic Strategy:

 Typically impossible to outperform competitors on all dimensions.

– –

Delivering superior customer benefits is usually costly Reducing costs often entails quality compromises.

 How you configure your activities when you strive to attain a low-cost position is likely to be different from how you configure activities when you strive to deliver superior customer benefits .  SO : Have two broad routes to competitive advantage

Examples of Resources and Capabilities

Sources: Adapted from (1) J. Barney, 1991, Firm resources and sustained competitive advantage (p. 101),

Journal of Management

, 17: 101; (2) R. Grant, 1991,

Contemporary Strategy Analysis

(pp. 100 –104), Cambridge, UK: Blackwell; (3) R. Hall, 1992, The strategic analysis of intangible resources (pp. 136 –139),

Strategic Management Journal

, 13: 135 –144.

Table 3.1

The

V

RIO Framework:

V

alue

 The Question of Value  Creates value for the customer. It does not mean that it is expensive.

 Only value-adding resources can lead to competitive advantage, whereas non value-adding capabilities may lead to competitive disadvantage.

 If firms do not shed non-value-adding resources and capabilities, they are likely to suffer below-average performance or become extinct.



The search for valuable resources and capabilities is an ever present challenge for virtually all firms in all countries.

The V

R

IO Framework:

R

arity

 The Question of Rarity  What you have and most/all competitors don’t have.

 Valuable

common

resources and capabilities can lead to competitive parity but no advantage.

 Valuable

rare

resources and capabilities can provide, at best, temporary competitive advantage.

 Resources and abilities that add value in new areas needed to keep up with the competition (benchmarking).  Once competitors develop equal abilities, then no unique and distinctive capability remains on which to build a competitive advantage.

The VR

I

O Framework: Hard to

I

mitate/Substitute

 Valuable and rare resources and capabilities are a source of competitive advantage only if competitors have a difficult time imitating them directly or indirectly.

 Imitation of tangible resources (such as plants, software, or trucking fleet) is easy.

 Imitation of intangible resources (knowledge, managerial talents, and organizational culture) is much more difficult.

 Some resources are impossible to imitate (SIA 3.1: The impossible-to imitate Terminator)  Sometimes you can substitute a resource or capability that is different but is a strategic equivalent .

The VRIO Framework: Imitability and Non-Substitutability (cont’d)

  Imitation Barriers:  Time compression diseconomies: Inability to acquire in a short period of time rivals’ resources and capabilities over a long history   (SIA 3.2: Mercedes’ failure in learning and practicing the Japanese capabilities of “design to cost”) Path dependencies: History matters   (SIA 3.3: Szczecin Shipyard in Poland) Causal ambiguity: What really causes the success of certain firms? Nobody really knows!

Substitutability Barriers: Patents, legal barriers, lack of knowledge, technical requirements, customer behavior

The VRI

O

Framework:

O

rganization

 The Question of Organization  How is a firm organized to develop and leverage the full potential of its resources and capabilities?

 A More Fundamental Question  Why do firms exist? In other words, why do people organize firms?

 Firms exist to develop and leverage resources and capabilities better than individuals could.

 Complementary Assets: Star power + other talents  Social Complexity: Movie production

Reminder: Resources and Capabilities

 The Resource-based View: (1) A firm consists of a bundle of productive resources and capabilities. (2) The bundles are different across firms. (3) They are not easily moved across firms.



Resources

 The tangible and intangible assets a firm uses to choose and implement its strategies.



Capabilities

 The skills a firm can use to bring its resources to bear.

 We follow leading resource-based theorists such as J. Barney, D. Collis, and C. Montgomery, by using the two terms, “resources” and “capabilities,” interchangeably and often in parallel.

Resources & Capabilities: Roots of competitive advantage determined with

VRIO

Framework

Resources Core Competencies Building Blocks Of Value Creation • Efficiency • Quality • Innovation • Customer responsiveness Higher Value Lower Cost Capabilities Value Creation

The VRIO Framework: Features of a Resource or Capability

Valuable Rare Costly to Imitate Yes Yes Yes Yes No Yes Yes Yes No Yes No Yes Exploited by Firm Yes No Yes Competitive Impact Parity Parity or Less Temporary Yes Sustained Performance Average Average (?) Above Average Above Average 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: Adapted from (1) J. Barney, 2002, Gaining and Sustaining Competitive Advantage, 2nd ed. (p. 173), Upper Saddle River, NJ: Prentice Hall; (2) R. Hoskisson, M. Hitt, & R. D. Ireland, 2004, Competing for Advantage (p. 118), Cincinnati: Thomson South-Western.

Table 3.2

Resources, Capabilities, and the Value Chain

   Value Chain  The functional activities within the firm that create value in the goods and services produced Components of the Value Chain   Primary activities  Are directly associated with the development, production, and distribution of goods and services.

Support activities  Assist in the accomplishment of primary activities.

Shows how a bundle of resources and capabilities come together to add value.

A Typical Company Value Chain

Primary Activities and Costs

Inbound Logistics Operations Outbound Logistics Marketing and Sales After Sales Service Profit Margin or Performance Procurement, R&D, Technology Development Human Resources Management Administrative Organization/Infrastructure

Support Activities

Value Chain – Primary Activities

 Involved in the creation of the product or service, its marketing and delivery to consumers, and after-sales service and support.

Area Inbound Logistics Operations Outbound Logistics Marketing & Sales After sales Service Definition Arrival of Inputs Converting Inputs Good or Service to Customer Getting Customers Help after sale Mftng + ++ + + + Service +/ ++ ++ ++

Value Chain – Support Activities

      Support Activities - provide inputs that allow the primary activities to take place – go across the primary activities.

Procurement – Buying what you need on a regular basis.

R&D – Developing new ideas/products/services.

Technology Development– How a company uses technology.

HR Management – How people are managed.

Organization/Infrastructure – How the company is organized; financial issues.

Main Points



Market incentives and market failures inform us concerning activities within the firm and outside the firm.



Firm performance depends on understanding its industry and its resources.



Analysis of a firm’s industry, resources, capabilities, and value -chain in one country may or may not transfer to other countries .



Which resources and capabilities can be used in other countries/markets to create value?



What resources or capabilities should we standardize across countries and what should we tailor to local market conditions? (use value chain)

Set up for Tomorrow

   Reading: Peng Text, Chapter 4 and ‘Spotting Institutional Voids in Emerging Markets’ Other Preparation: Read ‘Dubai – A new world’ and ‘Corn Flakes Clash. Consider: How are institutions influencing business in Dubai and in Europe?

Learning Objectives: To learn how formal and informal institutions impact the ability of a firm to succeed. These include government organizations, cultural norms and perceptions of corruption.