Week 4 strategic position strategic capability

3BM020 Organisational Strategy and Decision Making Session Glyn Littlewood Strategic Position & Strategic capability Outcomes covered in this session Following this session students should be able to understand: • What is meant by strategic capability & how it contributes to the competitive advantage of organisations • The strategic importance of resources, competences & dynamic capabilities • The development of options based on the distinctive capabilities & the core competencies of the organisation In the news: Tesco Clubcard Strategic Capability - Outline •In previous weeks we discussed how the external environment can create strategic opportunities and threats • However, some organisations competing in the same environment as competitors gain superior performance Resource based view (RBV) of strategy: The competitive advantage and superior performance of an organisation is based upon the distinctiveness of its capabilities Strategic Capability - applied Saloon cars compete within the same market, but… •BMW (see case study last week) has done well •Ford and Chrysler have struggled to adapt to environmental changes •Rover (UK) has gone out of business What were/are BMW’s strategic capabilities? Resources & Competences • Strategic capabilities are the capabilities of an organisation that contribute to its longterm survival or competitive advantage – Resources are the assets that organisations have or can call upon (e.g from partners or suppliers), that is ‘what we have’ – Competences are the ways those assets are used or deployed effectively, that is ‘what we well’ Strategic Capability - Outline 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 Fit and Stretch Internal strategic capability – Strengths and weaknesses • Matching strategic capabilities to opportunities in environment – Strategic fit or • Leveraging strategic capabilities for competitive advantage – Strategic stretch A traditional view of resources • Traditional economic categories of resources: – Labour – Capital – Land (to a lesser degree) • For Wernerfelt (1984:172) a resource is ‘anything which could be thought of as a strength or weakness of a given firm’ • Tangible resources are physical assets of an organisation such as plant, labour, and finance • Intangible resources are non-physical assets such as information, reputation, and knowledge Resource-based view (RBV) of Strategy • developed to answer the question: Why some firms achieve better economic performance than others? • used to help firms achieve competitive advantage and superior economic performance • assumes that a firm’s resources and capabilities are the primary drivers of competitive advantage and economic performance Comments on value chain analysis Weaknesses in the practical application of value added include the following: • • A lack of precision in identifying areas of resource advantage An inability to value clearly major assets like specialist knowledge and company leadership 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 Stretching and Adding Capabilities • • • • • • • Extending best practices Adding and changing activities Stretching competences Building on apparent “weaknesses” Ceasing activities Trade-offs External capability development 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 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 nonsubstitutable 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 Identifying the resources that deliver Strategic Competitive Advantage Four key questions related to strategic resources & capabilities Three broad categories: What are the resources and capabilities of an organisation? •Tangible resources Why we have them at all? •Organisational capabilities •Intangible resources Because they deliver value added Why are resources and capabilities important in strategy?…Because they deliver competitive advantage How can we improve competitive advantage? Identify the resources and capabilities of the organisation • Profit maximising, industry-based theories: SCA and value added derive from an analysis of the industry • Market structure - the number of firms and the degree of rivalry - forms the basis of competitive development • Market conduct - how firms behave towards each other will then influence strategy • Market performance - the strategies chosen in the context of the above two factors - then represents the development of strategy • Represented by Prof Michael Porter: Five-Forces Analysis and Generic Strategies analysis • But such theories not explain why two companies in the same industry achieve widely differing results Identify the resources and capabilities of the organisation • Resource-based view (RBV) of strategy development represents revised view of strategy development • Focuses on the individual resources of the organisation, rather than strategies common to all companies in an industry • Basic argument: important to understand the competitive forces in an industry, but organisations should seek their individual solutions within this context • Competitive advantage: derives from the exploitation of the relevant resources of the individual organisation when compared to others in the industry • Keypoint: RBV represents newer insight The VRIO Framework • Resources/capabilities with the potential to provide an organisation with superior performance must meet four criteria: – Valuable – the resource helps the organisation improve its value-added – Rare – few, if any, organisations possess this resource – Inimitable – the resource cannot easily be copied or substituted – Organised – the organisation must be able/organised to take advantage of the resource (Barney 1995, 2002) Applying the VRIO Framework If a firm’s resources are: The firm can expect: Not Valuable Competitive Disadvantage Valuable, but Not Rare Competitive Parity Valuable and Rare Competitive Advantage (at least temporarily) Performance Implications Valuable? Rare? Inimitable? Organised ? Competitive impact Performance implications No - - - Competitive Under disadvantage industry average Yes No - - Competitive parity Industry average Yes Yes No - Short term competitive advantage Over industry average Yes Yes Yes Yes Long term competitive advantage Over industry average Sustainable competitive advantage • • • Advantages over competitors that cannot easily be imitated Sustainable over time by being deeply embedded in the organisation Sources include: – Differentiation – Low costs – Niche marketing – High performance technology – Superior quality – Superior service – Vertical integration – Synergy – Culture, leadership and style of organisation Intensity of competition in an industry Measured by: • Degree of concentration of companies in the industry • Range of aggressive strategies of competitors in the market place Degree of concentration often summarised in the concentration ratio: ‘The percentage of industry value added or turnover controlled by the largest four, five or eight firms in an industry’ ... Fit and Stretch Internal strategic capability – Strengths and weaknesses • Matching strategic capabilities to opportunities in environment – Strategic fit or • Leveraging strategic capabilities... explicit knowledge • Question core rigidities Strategic Capability – Key Points (1) • Competitive advantage derives from strategic capabilities • Strategic capability comprises tangible and intangible... the organisation In the news: Tesco Clubcard Strategic Capability - Outline •In previous weeks we discussed how the external environment can create strategic opportunities and threats • However,