Chapter 3 - Examining the Internal Environment: Resources, Capabilities, and Activities ppsx

OBJECTIVES 1 2 3 4 5 Explain the internal context of strategy Identify a firm’s resources and capabilities and explain their role in its performance Define dynamic capabilities and expl

Chapter 3

Examining the Internal

Environment: Resources, Capabilities, and Activities

OBJECTIVES

1 2

3

4

5

Explain the internal context of strategy

Identify a firm’s resources and capabilities and explain

their role in its performance

Define dynamic capabilities and explain their role in both

strategic change and a firm’s performance

Explain how value‑chain activities are related to firm

performance and competitive advantage

Explain the role of managers with respect to resources,

COMPARATIVE INDUSTRY REFORMANCE

How do such differences in profitability materialize?

ROA ROS

Grocery Store

Global Auto Semiconductor

RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS

Strategy Competitive advantage/

disadvantage

Management strategic decision making

Capabilities

Managers

Resources

Performance

RESOURCES AND CAPABILITIES: FUNDAMENTAL BUILDING

BLOCKS OF 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

Resources

Strategy

TRUST AS AN ORGANIZATIONAL RESOURCE

Trust is an intangible resource 1

A trustworthy reputation for a firm can

be leveraged.

2

Knowledge as

a resource

Explicit (easy competitive intelligence) Tacit (more valuable)

EXAMPLES OF CAPABILITIES

Logistics distributing vast amounts of goods quickly and efficiently to remote locations

An extraordinarily frugal system for delivering the lowest cost structure in the mutual fund industry, using both techno-logical leadership and economies of scale

Generating new ideas then turning those ideas into new, profitable products

200,000-percent return to share-holders during first 30 years since IPO1

25,000-percent return to share-holders during the 30-plus year tenure of CEO John Connelly.2

As for ongoing expenses, share-holders 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

30 percent of revenue from products introduced within the past four years

Company

THE VRINE MODEL

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

non-

substitut-able?

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)

Exploit-able? For each step of the preceding steps of the VRINE test, can the firm actually

exploit the resources and capabilities that it owns or controls?

Resources and capabilities that satisfy the VRINE requirements but which the firm is unable to exploit actually result in significant opportu-nity costs (other firms would likely pay large sums to purchase the VRINE resources and capabilities)

Alternatively, exploitability unlocks the potential competitive and

perfor-Firms which control unexploited VRINE 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 VRINE)

Sustainability:

Just having a competitive advantage is not enough Can it

be sustained?

Durability Imitability

TANGIBLE AND INTANGIBLE ADVANTAGES

=

=

=

Intangible

Location selection

Brand

Tangible

Rural real-estate

High traffic real-estate

+

+

+

Wal-Mart

McDonald’s

HOW WOULD YOU DO THAT?

Inimitable and non-substitutable? Can competitors imitate? Can they substitute?

Pfizer’s Zoloft ®

DYNAMIC CAPABILITIES

Mail Boxes Etc franchise

Value

Dynamic capability:

how we integrate recon-figure, acquire, or divest resources for competitive advantage?

Mail boxes, etc., has developed the ability to combine resources better than the competition

Start-up plans

People Brand Location Processes

VALUE CHAIN: INTERNET STARTUP EXAMPLE

Inbound shipment of top titles Warehousing

Server operations Billing Collections

Picking and shipment of top titles from warehouse

Shipment of other titles from third- party distributors

Pricing Promotions Advertising Product information and reviews

Affiliations with other websites

Returned items

Customer feedback

CDs Shipping

Computers Telecom lines

Shipping services

Media

Inventory system

Site software

Pick & pack procedures

Site look & feel Customer research

Return procedures

Financing, legal support, accounting

Recruiting, training, incentive system, employee feedback

Procurement

Technology Development

Human Resources

Firm Infrastructure

Support

Activities

GUIDELEINES FOR OUTSOURCING

Activities that can create value for the firm should not be outsourced.

1

Those activities that represent key sources of learning for the firm should not be outsourced.

2

USING VALUE CHAINS TO GAIN COMPETITIVE ADVANTAGE

Identical Differentiated

Find a different

way to perform activities

Find a better way to

perform the same activities

Longer-lasting advantage

Shorter-term advantage (competitors catch up)

TRADE OFF PROTECTION YOUR RIVALS CHOOSE NOT TO COPY YOU

Selected difference between Southwest and large Airlines

Southwest

made choices so that competitors did not copy - because copying would require them to

abandon activities essential to their strategies

Technology

and design

Operations

Marketing

Southwest

• Single aircraft

• Short segment flights

• Smaller markets and secondary airports in major markets

• No baggage transfers to others airlines

• No meals

• Single class of service

• No seat assignments

• Limited use of travel agents

• Word of mouth

Major Airlines

• Multiple types of aircrafts

• Hub and spoke system

• Meals

• Seat assignments

• Multiple classes of service

• Baggage transfer to other airlines

• Extensive use of travel agents

INNOVATION AND INTEGRATION OF THE VALUE CHAIN

Transferred assembly and delivery

to the consumer

Choose an entirely direct distribution model (rather than through retailers) and

outsourced component manufacturing

IKEA

Dell

So

ble De live r

Area of innovation

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