Transcript Title

Chapter 3
Examining the Internal
Environment: Resources,
Capabilities, and Activities
OBJECTIVES
1
Explain the internal context of strategy
2
Identify a firm’s resources and capabilities and explain
their role in its performance
3
Define dynamic capabilities and explain their role in both
strategic change and a firm’s performance
4
Explain how value-chain activities are related to firm
performance and competitive advantage
5
Explain the role of managers with respect to resources,
capabilities, and value-chain activities
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COMPARATIVE INDUSTRY PERFORMANCE
ROA
Semiconductor
Global Auto
ROS
Grocery Store
How do
such differences in
profitability
materialize?
2
RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS
Resources
Managers
Strategy
Competitive
advantage/
disadvantage
Performance
Management
strategic decision
making
Capabilities
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RESOURCES AND CAPABILITIES: FUNDAMENTAL BUILDING
BLOCKS OF STRATEGY
Strategy
The inputs that firms use to create goods
and services
• Undifferentiated or firms-specific
• Tangible or intangible
• Easy to acquire or difficult
A firm’s skill in using its resources
to create goods and services.
The combination of procedures
and expertise that the firm relies
on to engage in distinct activities
in the process of producing goods and
services
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TRUST AS AN ORGANIZATIONAL RESOURCE
1 Trust is an intangible resource
2 A trustworthy reputation for a firm can
be leveraged.
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KNOWLEDGE
Knowledge as
a resource
Explicit (easy
competitive
intelligence)
Tacit (more
valuable)
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Learning Organizations
A Learning Organization Is Defined as:
An organization skilled at acquiring,
transferring, and creating knowledge,
and at modifying its behavior to
reflect new knowledge and insights.
EXAMPLES OF CAPABILITIES
Company
Capability
Result
Logistics -- distributing vast amounts of
goods quickly and efficiently to remote
locations
200,000-percent return to shareholders during first 30 years
since IPO1
An extraordinarily frugal system for
delivering the lowest cost structure in the
mutual fund industry, using both technological leadership and economies of scale
25,000-percent return to share-holders
during the 30-plus year tenure of CEO
John Connelly.2
As for ongoing expenses, shareholders in Vanguard equity funds pay,
on average, just $30 per $10,000, vs. a
$159 industry average. With bond
funds, the
bite is just $17 per $10,000
Generating new ideas then turning those ideas
into new, profitable products
30 percent of revenue from products
introduced within the past four years
1: Stalk, Evans, and Shulman, 1992
2: Makadok, 2003
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THE VRIO MODEL
Test
Competitive implication
Performance implication
Valuable?
Does the resource or capability allow the
firm to meet a market demand or protect
the firm from market uncertainties?
If so, it satisfies the value requirement.
Valuable resources are needed just to
compete in the industry, but value by
itself does not convey an advantage
Valuable resources and capabilities
convey the potential to achieve “normal
profits” (i.e., profits which cover the cost
of all inputs including the cost of capital)
Rare?
Assuming the resource or capability is
valuable, is it scarce relative to demand?
Or, is it widely possessed by most
competitors?
Valuable resources which are also rare
convey a competitive advantage, but its
relative permanence is not assured.
The advantage is likely only temporary.
A temporary competitive advantage
conveys the potential to achieve above
normal profits, at least until the
competitive advantage is nullified by other
firms
Inimitable
and nonsubstitutable?
Assuming a valuable and rare resource,
how difficult is it for competitors to either
imitate the resource or capability or
substitute for it with other resources and
capabilities that accomplish similar
benefits?
Valuable resources and capabilities
which are difficult to imitate or substitute
provide the potential for sustained
competitive advantage
A sustained competitive advantage
conveys the potential to achieve above
normal profits for extended periods of time
(until competitors eventually find ways to
imitate or substitute or the environment
changes in ways that nullify the value of
the resources)
Organiz
ation
Activata
ble?
For each step of the preceding steps
Resources and capabilities that
of the VIRO test, can the firm actually
satisfy the VIRO requirements but
exploit the resources and capabilities that it which the firm is unable to exploit
owns or controls?
actually result in significant opportunity costs (other firms would likely
pay large sums to purchase the
VIRO resources and capabilities).
Alternatively, exploitability unlocks
the potential competitive and performance implications of the resource
or capability
Firms which control unexploited VIRO
resources and capabilities generally
suffer from lower levels of financial
performance and depressed market
valuations relative to what they would
otherwise enjoy (though not as depressed
as firms lacking resources and
capabilities which do satisfy VIRO)
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Criteria for Sustainable Competitive Advantage and Strategic Implications
Is a resource or capability…
Valuable
Rare Inimitable/ Activatable Implications
Substitute
for Competitiveness
No
No
No
No
Competitive disadvantage
Yes
No
No
No
Competitive parity
Yes
Yes
No
No
Temporary competitive
advantage
Yes
Yes
Yes
Yes
Sustainable competitive
advantage
Criteria for Sustainable Competitive Advantage and Strategic Implications
Source; Adapted from J. Barney, “Firm Resources a Sustained Competitive Advantage, ‘ Journal of
Management 17 (1991), pp. 99-120.
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SUSTAINABILITY
Sustainability:
Just having a
competitive
advantage is not
enough. Can it
be sustained?
Durability
Imitability
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TANGIBLE AND INTANGIBLE ADVANTAGES
Intangible
Tangible
+
=
Location selection
+
Rural real-estate
=
Wal-Mart
Brand
+
High traffic
real-estate
=
McDonald’s
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HOW WOULD YOU DO THAT?
Valuable?
Do patents on Zoloft ®
provide value?
Rare?
Do Pfizer's patents provide
“rarity”?
Inimitable and
non-substitutable?
Can competitors imitate?
Can they substitute?
Activatable?
Can Pfizer exploit?
Pfizer’s
Zoloft ®
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DYNAMIC CAPABILITIES
Start-up plans
Mail Boxes Etc. franchise
People
Brand
Value
Location
Processes
Dynamic capability:
how we integrate reconfigure, acquire, or divest
resources for competitive
advantage?
Mail boxes, etc.,
has developed the
ability to combine
resources better
than the
competition
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The Value Chain
3-15
GUIDELINES FOR OUTSOURCING
1 Activities that can create value for the
firm should not be outsourced.
2 Those activities that represent key
sources of learning for the firm should
not be outsourced.
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USING VALUE CHAINS TO GAIN COMPETITIVE ADVANTAGE
Identical
Differentiated
Find a different
way to perform
activities
Longer-lasting
advantage
Find a better way to
perform the same
activities
Shorter-term
advantage
(competitors
catch up)
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TRADE OFF PROTECTION YOUR RIVALS CHOOSE NOT TO COPY YOU
Selected difference between Southwest and large Airlines
Southwest
Major Airlines
Technology
and design
• Single aircraft
• Multiple types of
Operations
• Short segment flights
• Smaller markets and secondary
aircrafts
airports in major markets
•
•
•
•
Marketing
No baggage transfers to others airlines
No meals
Single class of service
No seat assignments
• Limited use of travel agents
• Word of mouth
• Hub and spoke
system
• Meals
• Seat assignments
• Multiple classes of
service
• Baggage transfer to
other airlines
Southwest
made choices so
that competitors
did not copy because copying
would require
them to
abandon
activities
essential to their
strategies
• Extensive use of
travel agents
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INNOVATION AND INTEGRATION OF THE VALUE CHAIN
Area of innovation
IKEA Transferred assembly and delivery to
the consumer
Dell
Choose an entirely direct distribution model
(rather than through retailers) and
outsourced component manufacturing
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STRATEGIC LEADERSHIP
“Companies that overlook the role of leadership in
the early phases of strategic planning often find
themselves scrambling when it’s time to execute.
No matter how thorough the plan, with-out the right
leaders it is unlikely to succeed”
– McKinsey & Company
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