Today: Internal AnalysisAdministrative issuesCurrent EventsChapter 4: Internal ScanningValue Chain AnalysisRCA Records Case AnalysisTeam Assignment

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Resources & Capabilities

Strategy From Resource-based Perspective

How do resources create competitive advantage?

Value-Chain Analysis

Strategic Analysis -Where Do We Stand?

IndustryAnalysi

s

Resources& Capabilities

Strengths &Weaknesses

Opportunities& Threats

Values OfManagement

Values OfStakeholde

rs

StrategyInternalFactors

ExternalFactors

The Role of Strategy In Business - The Linkage Between Strategy, Resources, & Organization

Position

Resources& Capabilities

Organization

The Challenges Of Resource-Based Strategy

What Resources Do We Have?

Are They Fully Exploited?

How Else Could We Exploit Our Resources?

What Resources & Capabilities Are We Going To Need In The Future?

How Do We Build Those Resources & Capabilities?

Resource-Based View

Two Basic assumptions of RBV:

Resource heterogeneity: • Firms possess different bundles of resources

Resource immobility:• Resources are sticky- they are difficult to imitate

and don’t move quickly between firms

Resource-Based ViewCore competencies = company strengths that competitors cannot easily match or imitate

sources of competitive advantage.

 Core competencies arise from: Resources = financial, physical, human, technological, and organizational assets of the firm; tangible resources (land, buildings, plant and equipment); intangible resources (brand names, reputation, patents, and technological or marketing know-how) Capabilities = company's skills at coordinating resources and putting them to productive use; reside in organizational routines (internal processes, structure, culture)

Some Terminology

Resources• Assets• Inanimate Objects• “Nouns,” “Things”

Capabilities• Skills, Aptitudes• Activities• “Verbs,” “Doing Things”

Different Types Of ResourcesPhysical Assets

Plant, Equipment, & Real Estate

Financial AssetsCash & Leverage

Human AssetsIndividual Skills & Capabilities

Intangible AssetsBrand Names, Technology, Reputation

Organizational AssetsOrganizational Routines & Team-Embodied Skills

Example: Walmart

Resources superior store locations

• located in rural or semi-rural areas with little or no direct competition. strong brand reputation

• customers know that prices are extremely low and quality is acceptable. employee loyalty

• lower turnover and thus lower labor costs than competitors.

Capabilities supply chain management ability to motivate workers with a minimum of supervision and controls

Core CompetenciesCore Competencies

ResourcesResources• Inputs to a firm’s Inputs to a firm’s

production processproduction process

Core CompetenceCore Competence• A strategic capabilityA strategic capability

The source ofThe source of CapabilityCapability• Integration of a Integration of a

team of resourcesteam of resources

Does the capability satisfy Does the capability satisfy the criteria of sustainable the criteria of sustainable competitive advantage?competitive advantage?

YESYES

NONO

CapabilityCapability• A nonstrategic team A nonstrategic team

of resourcesof resources

Core competenceWhat are the core competencies of these firms?

McDonald’s

Ford Motor

Intel

Coke

How Do Resources and Capabilities Lead To Competitive Advantage? (VRIO Framework)

ValuableDoes it create “value” for the customer

RareDo other firms have similar resources

Difficult to ImitateUnique Historical Conditions (Southwest Airlines)Special environmental forces

OrganizationAre you organized to take advantage of your resourcesAppropriable: ability of stakeholders to bargain profits away

*Nonsubstitutable Capabilities that do not have strategic equivalents, such as firm-specificknowledge or trust-based relationships

Profit-Earning Potential Of Resources & Capabilities

Profit-EarningPotential

Magnitudeof Advantage

SustainabilityOf Advantage

Rareness

Value

Imitability

Organization

But beware!

The harder you make it to imitate a resource, the more likely it is someone will find a substitute for it.

Dell pioneered direct mail/internet based marketing for PCs because it was locked out of the normal distribution channels.

Canon built highly reliable copiers to neutralize Xerox’s advantage of servicing capabilities

Inertia & Inflexibility -The Darkside of the Resource-based Approach

The Problem of InertiaIsolating mechanisms are almost never permanent. Changes in technology or consumer demand can make them obsolete

Unexpected technological developments or changes in demand allow entrepreneurs to create new competencies

Overcoming These ObstaclesExperimentation & Renewal

Core Competencies -- Cautions and RemindersCore Competencies -- Cautions and RemindersNever take for granted that core competencies will continue to provide a source of competitive advantageNever take for granted that core competencies will continue to provide a source of competitive advantage

All core competencies have the potential to become Core RigiditiesAll core competencies have the potential to become Core Rigidities

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environmentStrategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

A core rigidities story

Through WWII, Coke was it. It had a beautiful product design—the 7oz. Bottle.

Pepsi turned this into a disadvantage—by selling 12 oz. Pepsi—for the same price as Coke.

Coke’s design cost it market share, as “cheap consumers” bought the “better value”

Vertical Chain of Production in (Branded) Soft Drink Production

Corn Syrup Production (e.g.ADM)

Concentrate Production(PEPSI)

Retail

(e.g. Walmart,7-11)

Fountain Outlets(e.g. Taco Bell)

Bottling(independent franchise bottlers)

Distribution

(Independent franchise bottlers)

Container Production(e.g. Crown Cork & Seal)

Marketing

(Pepsi)

Identifying A Firm’s Resources & Capabilities Through Value Chain Analysis

What Sequence of Activities Are Involved In Creating Value?

Firm Infrastructure

Human Resource Management

Technology & Product Development

Purchasing& InboundLogistics

ProductionDistributionMarketing& Sales

Service

MA

RG

IN

The Value Chain

 Primary activities = involved in the physical creation of the product, its marketing and delivery to consumers, and after-sales service and support.

 Support activities = provide the inputs that allow the primary activities to take place.

Using Value Chain Analysis To DetermineThe Sources of Competitive Advantage

Beyond simply using a value chain analysis to “map out” the sequence of activities, we need to do the following:

What is the cost structure of each of these activities?

How do we compare with other competitors in each of these areas? What are our strengths and weaknesses?

Value Chain AnalysisStep 1. Disaggregate the firm into separate activities.

Step 2. Identify the resources and capabilities associated with each activity.

Step 3. Assess resources and capabilities in terms of their contributions to strategy.

Step 4. Assess linkages across activities.

Step 5. Determine what incremental or revolutionary changes are needed.

The Value ChainTo gain a competitive advantage over its rivals, a

company must either (1)perform value-creation functions at a lower cost or(2)perform them in a way that leads to differentiation and a

premium price.

 Cost Advantage• Technology• Manufacturing• Organization & Culture

Differentiation Advantage• Marketing, Sales & Service• Brand Name Capital• Product Development Organization

Value Chain Analysis

What Sequence of Activities Are Involved In Creating Value for an organization?

Firm Infrastructure

Human Resource Management

Technology & Product Development

Purchasing& InboundLogistics

ProductionDistributionMarketing& Sales

Service

MA

RG

IN

Value Chain Analysis of activities

What are the primary activities?What are the support activities?What are company’s core competencies?How should a company reconfigure the value chain to gain a competitive advantage?

Determine the boundaries of the firm (in-house, outsource, or partnership)Vertical and horizontal integrationGeographical location of activities

Develop coordination where linkages are critical. Coherence.

SWOT AnalysisA simple tool for positioning analysis

Internal Factors

Strengths

Weaknesses

Let’s apply this to what we know about Southwest Airlines.

External Factors

Opportunities

Threats

Is it okay to have weaknesses? How can a company mitigate threats?

Dangers of this tool

Static vs. Trends

Strategic fit

Distinct competence vs. competitive

advantage

The Internal EnvironmentThe Strengths and Weakness of the Firm

A Firm’s Tangible & Intangible Resources combine with Firm’s Capabilities to create Distinctive Competencies

Distinctive Competencies – those activities that a firm performs better than any competing firm

The Internal Environment

The Strengths and Weakness of the Firm

Sustained Competitive Advantage – firms that possess and exploit costly to imitate, rare, and valuable resources & capabilities in choosing and implementing their strategies may enjoy a period of sustained competitive advantage and above normal economic profit.

The Internal Environment

The Strengths and Weakness of the Firm

Tangible Resources: manufacturing firm’s property & equipment, R & D firm’s patents, telephone company’s network of wire, cable,

and satellites, …

The Internal EnvironmentThe Strengths and Weakness of the Firm

Intangible Resources: well-known and trusted brand names, firm’s good reputation, knowledgeable and creative workforce, unifying corporate culture, international firm’s experience with national

governments, visionary leader with strong motivation and

communications skills,…

The Internal Environment

The Strengths and Weakness of the Firm

CapabilitiesEmerge over time through complex interaction between and among tangible and intangible resources.Become stronger and more valuable strategically through repetition and practice.Skills and knowledge of firm’s employees, including functional expertise (human capital)

The Internal Environment

The Strengths and Weakness of the Firm

Capabilities

Examples:• Just-in-time (JIT) delivery and well-trained

inventory specialists• Database management systems and effective

market research efforts

The Internal Environment

Primary ActivitiesInbound LogisticsOperationsOutbound LogisticsMarketing and SalesCustomer Service

Secondary Activities Firm Infrastructure Human Resource

Management Technology Development Procurement

Value Chain AnalysisThe Strengths and Weakness of the Firm

The Internal Environment

Life Expectancy of Sustained Competitive Advantage

Length of Innovation Cycle the faster the cycle, the easier it is to take away competitive advantageExample: New generation of cameras born about every 10 months

Number of Dimensions of Customer Value the more dimensions, the easier it is for competitors to find ways of eroding competitive advantageExample: An I-beam is an I-beam, but an automobile comes in many shapes, sizes, etc.

The Internal Environment

Life Expectancy of Sustained Competitive Advantage

Switching Costs Between Rivals: the easier it is to switch, the easier it is to take away competitive advantage

Example: Difficulty in switching between office systems management service providers versus ease of switching between office supplies provider.

Questions for RCA Records

How are industry changes affecting traditional record companies, new entrants, artists, and retailers?Describe RCA’s business strategy.Where do you envision the music industry in three to five years?What, if anything, should RCA do differently?

Next Time: Strategic Coherence

Read Chapter 5

Handout on Strategic Coherence

Team Time

Assign American Airlines Case

WEBSITE: www.sba.pdx.edu/faculty/stephens/ss.html