The case analysis process of strategic management (1)

Sustainability of a Competitive Advantage • Sustainability of a competitive advantage is a function of: – the rate of core-competence obsolescence due to environmental changes, e.g., technological shifts – the availability of substitutes for the core competence – the imitability of the core competence, e.g., diffusion of an innovation – whether the firm is properly organized to capture value External and Internal Analyses Environment al ob nt Gl me on vir En Competitor Environment Technological Po liti cal En /Le vir g on me a l nt Industry Environment al ner c Ge mi ono Ec Ge n De mo eral gra ph ic Sociocultural By studying the external environment, firms identify what they might choose to (Structure>Conduct>Performance) Opportunities and threats General External and Internal Analyses By studying the firm’s (internal) capabilities & resources, firms identify what they can (over time) Unique resources, capabilities, and competencies (sustainable competitive advantage) Internal Analysis (Resources, Capabilities) • How we effectively manage current core competencies while simultaneously developing new ones? (exploit/explore) • How we assemble bundles of resources, capabilities and core competencies to create value for customers? • How we learn to change rapidly? What affects decisions about Resources, Capabilities, and Core Competencies • Uncertainty regarding current/future characteristics of the general and industry environments • Complexity - the interrelationship among factors that shape a firm’s environment(s), and top management perceptions of these environments • Intraorganizational Conflicts among people making and affected by resource allocation decisions Components of Internal Strategic Analysis Competitiveness Core Competencies Identifying Core Competencies Identify sustainable competitive advantages Four Criteria of Sustainable Advantage Value Chain Analysis Capabilities Resources • Tangible • Intangible • • • • Valuable Rare Imitation/Substitutes = costly Organized properly • In/Outsource • decisions Discovering Core Competencies Resources • Tangible • Intangible Resources are what a firm draws upon to create value its assets– and valuable resources are embedded and difficult to trade in markets Resources are inputs into a firm’s production process IP, capital equipment, skills, brands, organizational routines, access to financial capital, talented managers, etc Discovering Core Competencies Resources • Tangible • Intangible Tangible • Financial • Physical • Labor Intangible • Technological • Innovation • Reputation • Organizational activity systems • Knowledge markets for resources are often imperfect resources are not intrinsically valuable Discovering Core Competencies Capabilities Capabilities describe the firm’s ability to create, deploy, modify, reconfigure, and leverage resources Valuable capabilities permit resources to be combined in unique ways to create core competencies markets for capabilities are imperfect Discovering Core Competencies Core Competencies are resources and capabilities that are a source of competitive advantage over rivals make a firm distinctive McKinsey and Co recommends isolating 3-4 competencies when framing strategic actions Consider Amazon (culture, transaction scale economies, bundling, virtualization) 10 d? ita te /S ub O st rg Co an stl iz e y Im Va lu ab le ? Ra re ? ? Performance Implications No No Yes Performance Implications Competitive Disadvantage Below Average Returns No No No Yes/ No Competitive Parity Average Returns Yes No Yes/ No Temporary Competitive Advantage Above Average to Average Returns Yes Sustainable Competitive Advantage Above Average Returns Yes No Yes Competitive Consequences Yes Yes 15 16 Value creation • Profit determined by : – The amount of value customers place on firm’s goods or services (V) – Firm’s cost of production (C) • Consumer surplus occurs when price charged by a firm on a good or service is less than value placed on it by a customer • Value creation = V-C 17 Value creation 18 Porter’s Value Chain Support Activities Firm Infrastructure Human Resource Management Technology Development Procurement Primary Activities Lo d un o Inb ics t s gi er p O Upstream value activities activities ns o i at d un o tb cs Ou gisti Lo g tin s e rk le Ma d Sa an Downstream value 19 S ice v r e Value Value Chain Chain activities activities in in Bio/Pharm Bio/Pharm 20 Value Value Chain Chain in in Communications Communications Technology Technology Industry Industry Source MIT Sloan School – “Architectures and roadmaps for communications and media” 21 Global Value Chain Management Supplier A Supplier B Supplier N Assembling, Manufacturing and Sales Distribution Center Supplier X Supplier Y Supplier Z Assembling, Manufacturing and Sales Country Country Market Market A B Where Where will will you you design, design, assemble, assemble, 22 inventory, market, and manage? Outsourcing Support Activities Outsourcing is the purchase of some or all of a value-creating activity from an external supplier M Human Resource Mgmt g in ar Technological Development Procurement M Service a r g in Marketing & Sales Outbound Logistics Operations Inbound Logistics Primary Activities Usually this is because the specialty supplier can provide these functions more efficiently Firm Infrastructure 23 Strategic Rationales for Outsourcing • Improve Business Focus – lets company focus on broader business issues by having outside experts handle various operational details • Provide Access to World-Class Capabilities – the specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications 24 Strategic Rationales for Outsourcing • Accelerate Business Re-Engineering Benefits – achieves re-engineering benefits more quickly by having outsiders who have already achieved world-class standards take over process • Share Risks – reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities 25 Strategic Rationales for Outsourcing • Free Resources for Other Purposes – permits firm to redirect efforts from noncore activities toward those that serve customers more effectively 26 Outsourcing Issues • Greatest Value – outsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourced • Evaluating Resources and Capabilities – don’t outsource activities in which the firm itself can create and capture value • Environmental Threats and Ongoing Tasks – not outsource primary and support activities that are used to neutralize environmental threats or complete necessary ongoing organizational tasks 27 Outsourcing Issues • Nonstrategic Team of Resources – not outsource capabilities that are critical to their success, even though the capabilities are not actual sources of competitive advantage • Firm’s Knowledge Base – not outsource activities that stimulate the development of new capabilities and competencies 28 Core Competencies: Cautions and Reminders • Never take for granted that core competencies will continue to provide a source of competitive advantage • All core competencies have the potential to become core rigidities • Core rigidities are former core competencies that now generate inertia and stifle innovation 29 ... characteristics of the general and industry environments • Complexity - the interrelationship among factors that shape a firm’s environment(s), and top management perceptions of these environments... of Internal Strategic Analysis Competitiveness Core Competencies Identifying Core Competencies Identify sustainable competitive advantages Four Criteria of Sustainable Advantage Value Chain Analysis. .. as a Strategic Capability Resources • Inputs to a firm’s production process Capability Affected by • integration of resources Core Competence • Capability that is strategic Does it satisfy the