Session 4

INTERNAL CAPABILITY

Session 4 2

1. Achieving successful market position is influenced by internal capabilities.

2. Need to read weak market signals that provide the basis for innovation.

3. Success is associated with an entrepreneurial leader.

4. Innovative organisations will enjoy higher profitability.

5. Organisation must exhibit high level productivity.

6. Superior employee skills are mandatory.7. Superior service quality requires capability to

rapidly identify the degree of the diversity in consumer expectations.

8. Need error free products or services.

Session 4 3

Business Failure

• History of firms growing and then disappearing (e.g. Pan Am).

• Some failures due to arrival of more innovative product (e.g. digital camera).

• More usual reason is competitor improves existing product (e.g. Toyota/Honda versus Ford/GM).

Session 4 4

• Miller and Friesen classified failing firms into 4 types:

(1) Impulsive firm run by risk taking CEO who ignores opinions of others

(2) Stagnant bureaucracy which is firm which ignores emerging threats

(3) Headless giant – large corporation with no real leadership at the top.

(4) Upstream swimmer fails to re-invest in innovation and replacement CEO is poor leader

Session 4 5

The Lemming

• Leader who sees others apparently enjoying success and implement even riskier version of duplicate strategies

• Bradford & Bingley UK financial institution followed Northern Rock model of borrow in short term money market to lend long term mortgages.

• Bradford & Bingley CEO decided to implement more aggressive version of this strategy.

Session 4 6

• Permitted mortgage applicants to self certify income without checking accuracy.

• Aggressive lending in overheating buy-to-let market.

• Acquired Mortgage Express which found mortgages for high risk borrowers.

• 2008 banks could not borrow in short term money market.

• Government intervention in Bradford & Bingley to save the organisation from financial melt down.

Session 4 7

Resource Based View (RBV)

• Company decline due to not focusing on product or process innovation.

• RBV theory that strategic opportunity from:

(1) Superior internal capability to develop new or improved products (e.g. Honda - engineering excellence)

(2) Use superior operational capability to lower costs and hence prices (e.g. Wal-Mart’s superiority in logistics and distribution)

Session 4 8

Assembling Skills

• Successful entrepreneurs understand need to compliment and enhance own skills.

• Sam Farber spotted opportunity for kitchen products to help older people with declining grip.

• Hired Smart Design to develop products and gerontologist to provide understanding of human behaviour.

• Launched “Good Grip” product range.

Session 4 9

• Group of entrepreneurs in USA launch of online store “Senior Superstores”.

• Focus on lifestyle, comfort, health and leisure products for older people.

• Assembled website development and operations team.

• Added expertise by hiring healthcare specialists to advise on market needs and opportunities.

Session 4 10

Proactive Opportunity Identification

Strategy Formulation

Plan Formulation

New Product Development

Financial Resource Management

InnovationCulture Productivity People Quality Information

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STRATEGICCAPABILITY

INTERNAL CAPABILITY FACTORS CONTRIBUTING TO MARKET SUCCESS

OPERATIONAL CAPABILITIES

Session 4 11

Core Capabilities

• Start point is strategic competence.• Capability to identify weak signals of

emerging trends and opportunities.• Ability to specify effective strategy to

deliver superior proposition.• Need for capability to develop appropriate

plan for implementing selected strategy.

Session 4 12

• Requirement to be able to develop and launch successful new products or services.

• Success depends on ability to acquire and utilise financial resources needed to support strategic plan.

• Critical role of entrepreneur as leader to inspire and motivate workforce (e.g. Bill Gates; Steve Job).

Session 4 13

• Leader must comprehend how to specify “distinctive competence” to provide basis for outperforming competition.

• Role and issue emphasis may change over time.

• Research on high-tech entrepreneurs revealed all recognised importance of “functional competencies” (e.g. Marketing, Finance, HRM etc.)

Session 4 14

• Also identified need for “self competencies”:

1. Intellectual integrity of understanding own strengths/weaknesses plus hiring others to compliment personal skills

2. Moving from a “me” to “we” attitude as firm grows and leader becomes mentor/coach of team

3. Strategic thinker involving focus on longer term, withdrawal from day-to-day management activities

Session 4 15

• Fernald et al project to compare entrepreneurs versus successful business leaders.

• Determined both shared number of characteristics.

Characteristic Entrepreneurial Leaders Business Leaders

Ability to motivate othersAchievement drivenCreativeFlexibleNot adverse to taking risksPatientPersistentVisionary

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Session 4 16

• Intrapreneurs (entrepreneurs inside large organisation) exhibit characteristics of:– Able to identify appropriate vision– Exhibit stubborn patience– Listens to others and never rejects help– Never abandons goal of innovation and

accepts blind alleys will occur– Recognise the benefits of team-based

approach to implementation– Shares rewards and success with team

Session 4 17

Customer-Entrepreneur Shared Values

• Anita Roddick founder of Body Shop believed in being eco-responsible and not use animals in product testing.

• Offered natural organic ingredients.• Lack of cash required move to expand via

franchise.• Franchise owners and consumers shared

Anita’s values and views.

Session 4 18

Innovative Culture

• Scale of innovation can range from improving existing product through to “new-to-world” proposition.

• Speed of change and innovation varies by industrial sector.

• Retail branded grocery products change much more slowly than electronic goods (e.g. computers, mobile phones).

Session 4 19

• Highest profitability among manufacturers in industrial sector who exhibit innovate culture.

• Focus in mature industries biased towards process change:– Reducing costs– Improving quality– Saving time

• Process innovation critically dependent on innovative culture throughout entire organisation.

Session 4 20

Productivity

• Profit = Price – Costs.• Profit = Added Value achieved in

production and marketing of output.• Comparison usually based on formula

productivity per employee = (annual profit ÷ number of employees).

• Smaller entrepreneurial firms tend to achieve lower productivity/employee.

Session 4 21

• Reflects inability to exploit economies of scale available to larger firms.

• Smaller firms may be unable to afford to hire most highly skilled individuals.

• Low technology sector labour is highest single area of cost.

• Smaller entrepreneurial firms focus on innovation may divert them from actions to improve work flows or act to remove process bottlenecks.

Session 4 22

People

• Common claim “people are our most important asset”.

• Very valid in service markets where lack of product differentiation means employees influence delivery of superior service.

• Example of upmarket U.S. retailer Nordstrom where employees committed to developing strong commitment to meeting individual customer needs.

Session 4 23

• Superior service quality is critical when serving older, wealthier consumers.

• Firms often find retaining staff important because more experienced employees deliver superior service.

• Experienced staff act as mentors and coaches for less experienced, younger staff.

• Do need to accept some work environments create physical problems for older, less mobile employees.

Session 4 24

Capability and Loyalty

• Rachel’s Organic Dairy producer has staff ranging from 17 to 63.

• Older staff lead teams and reinforce quality culture.

• Firms need to recognise older employees can be invaluable.

• Poorman-Douglas, U.S. cheque printing company 10% of workforce 65+ and believe older employees more loyal and hard working

Session 4 25

Quality• During 1970s Western firms responded to

inflation by reducing quality to avoid price increases.

• Japanese focused on superior quality as competitive advantage in world markets.

• Pioneered concepts such as Total Quality Management (TQM).

• Western firms finally recognised critical importance of quality, especially in service sector markets.

Session 4 26

• Small entrepreneurial firms face threat of price competition by larger competitors.

• Need for smaller firms to focus on superior quality to justify higher prices.

• Small firm usually has more flexible, faster responding workforce.

• Success does demand internal system for identifying and resolving any quality problems.

Session 4 27

• Consumers more loyal to superior service providers.

• Many older consumers more interested in quality than lowest possible price.

• Quality assessment is achieved by determining gap between expectation and actual experience (or “perceptions”).

• Service gap model proposes five sources of quality gaps.

Session 4 28

Financially Attractive Consumer Market Service Gap Model

Undifferentiated 

Services ProcessesDelayed Updating 

of Service 

Processes

Undifferentiated 

Performance StandardsSlow Performance 

Standards Updating

Service       Delivery

Generic 

Customer 

Perception

Consumer 

Segmented 

Expectations

Changing 

Expectations

Perception 

Updating 

Delays

Undifferentiated 

Communication

Outdated 

Communication

GAP 1a GAP 1b

GAP 2a GAP 2b

GAP 3a GAP 3b

GAP 4a

GAP 4b

GAP 5a GAP 5b

Session 4 29

• Gap 1 because organisation has no information on customer expectations.

• Gap 2 where organisation fails to specify formal quality standards.

• Gap 3 where internal capabilities to deliver quality are inadequate.

• Gap 4 due to incorrect information being communicated.

• Gap 5 = sum of Gaps 1 through 4.

Session 4 30

Different Needs

• Important to recognise that older consumers may develop different needs.

• When young need for sun and prices affordable to take whole family.

• Older consumers want:– Safety and no hygiene risks– High level of personal service– Transparency of all costs– Authenticity at overseas travel location

Session 4 31

Information• Data stored in a person’s mind = tacit

information.• Tacit data usage requires personal 1-to-1

interaction.• Available information (e.g. on file) = explicit

information.• Large organisations understand need to

maximise amount of information in explicit form.• Large firms also recognise need to monitor

external explicit information to identify new market trends.

Session 4 32

• Internet has greatly improved ability of all firms to rapidly, at low cost, to acquire external information.

• Government and commercial sources provide data on consumer spending, social activities and consumption patterns.

• Problem is these data rarely provide early indication of emerging lifestyle shift.

Session 4 33

• Additional problem with older consumers is different studies use different age group classifications.

• Some studies on people 50+, others on consumers of pensionable age (e.g. 60 or 65+).

• Problem further complicated because age is a poor classifier in relation to lifestyle differences.

• Once new product/service launched early data can be invaluable for identifying further opportunities or product weaknesses.

Session 4 34

• Entrepreneurs often tend to favour intuitive decision making so do not make good use of available data.

• More experienced entrepreneurs mix intuitive thinking with fact-based situation analysis.

• Nevertheless more entrepreneurs need to recognise advances in IT makes creation of computer-based MIS a feasible proposition.

• MIS systems crucial in online operation in order to exploit incoming real time data from customers.