chapter 3 examining the internal context of strategy
TRANSCRIPT
2
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, capabilities, and value‑chain activities
3
COMPARATIVE INDUSTRY REFORMANCE
How dosuch differences in profitability materialize?
ROA
ROS
Grocery Store
Global AutoSemiconductor
4
TWO THEORIES FOR HOW AND WHY SOME FIRMS PERFORM BETTER THAN OTHERS
A firm’s resources and capabi-lities determine performance
Success issues from fundamental differences in what firms own and what they can do
A firm’s activities determine performance
Success is driven by a firm’svalue chain activities:How it configures these activities to add more valuethan competitors
5
RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS
StrategyCompetitive advantage/disadvantage
Management strategic decision making
Capabilities
Managers
Resources
Performance
6
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
Capabilities
(competencies
)
Resources
Strategy
7
EXAMPLES OF CAPABILITIES
1: Stalk, Evans, and Shulman, 19922: Makadok, 2003
Capability Result
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
8
THE VRINE MODEL
Performance implicationTest Competitive 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 require-ment. Valuable resources are needed just to compete in the indus-try, 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 advant-age, 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 com-petitors 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-mance implications of the resource or capability
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)
9
Value: A resource or capability is valuable if it allows a firm to take advantage of opportunities or to fend off threats in its environment
THE VRINE MODEL: VALUE
Union Pacific Railroad’s rail system is a tangible resource that allows UP to compete with other carriers in the long-haul transportation of a variety of goods
• Maintain an extensive network of rail-line property and equipment on the U.S. Gulf cost
• Operates in the western two-third of the United States serving 23 states, linking every major West Coast and Gulf Coast port, and reaching east through major gateways in Chicago, St.Louis, Memphis, and New Orleans
• Also operates in key north-south corridors
• The only U.S. railroad serving all six gateways to Mexico
• Interchanges traffic with Canadian rail systems
Example
Definition
10
THE VRINE MODEL: RARITY
Example
When McDonald’s signs an agreement to build a restaurant inside a Wal-Mart store, it has an intangible advantage over Burger King that is valuable and rare
A useful resource or capability that is scarce relative to demand.
Valuable resources that are available to most competitors (i.e., that are not rare) simply allow firms to achieve parity
Definition
11
Example
THE VRINE MODEL: INIMITABILITY AND NON-SUBSTITUTABILITY
Barnes & Noble’s large store network gave it access to customers and purchasing power that was inimitable …
… but Amazon.comfound a substitute
Definition
• A resource or capability is inimitable if competitors cannot acquire the valuable and rare resource quickly, or face a disadvantage in doing so
• It is non-substitutable if a competitor cannot achieve the same benefit using different combinations of resources and capabilities
12
TANGIBLE AND INTANGIBLE ADVANTAGES
=
=
=
Intangible
Location selection
Brand
Tangible
Rural real-estate
High traffic real-estate
+
+
+
Wal-Mart
McDonald’s
13
THE VRINE MODEL: EXPLOITABLITY
Novell: “I walk down Novell hallways and marvel at the incredible potential for innovation here, but Novell has had a difficult time in the past turning innovation into product in the market place”
- CEO Eric Schmidt
Xerox: Xerox invented the laser printer, Ethernet, graphical-interface software and computer mouse but could not capitalize on these
Example
A resource of capability that the organization has the capability to exploit (i.e., the capability to generate value from)
Definition
14
HOW WOULD YOU DO THAT?
Inimitable andnon-substitutable?
Can competitors imitate?Can they substitute?
Exploitable? Can Pfizer exploit?
Rare? Do Pfizer's patents provide “rarity”?
Valuable?Do patents on Zoloft ®provide value?
Pfizer’sZoloft ®
16
DYNAMIC CAPABILITIES
Mail Boxes Etc. franchise
Value
Dynamic capability: how we integrate recon-figure, acquire, or divest resources for competitiveadvantage?
Mail boxes, etc., has developed the ability to
combine resources better
than the competition
Start-up plans
People
Brand
Location
Processes
17
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
CDsShipping
ComputersTelecom lines
Shipping services
Media
Inventory system
Site software
Pick & pack procedures
Site look & feelCustomer research
Return procedures
Financing, legal support, accounting
Recruiting, training, incentive system, employee feedback
Procurement
TechnologyDevelopment
HumanResources
FirmInfrastructure
SupportActivities
InboundLogistics
Operations OutboundLogistics
Marketing& Sales
After-Sales Service
Primary Activities
18
USING VALUE CHAINS TO GAIN COMPETITIVE ADVANTAGE
Identical DifferentiatedFind a different way to perform activities
Find a better way to perform the same activities
Longer-lasting advantage
Shorter-term advantage (competitors catch up)
19
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
Technologyand design
Operations
Marketing
Southwest
• Single aircraft
• Short segment flights
• Smaller markets and secondaryairports 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
20
RESULTS OF TRADE OFF PROTECTION
Airline
AirTran
Alaska
American
AmericaWest
Continental
Delta
JetBlue
Northwest
Southwest
United
US Air
2004 Revenue($000,000)
279
656
4,541
579
2,397
3,641
334
2,753
1,655
3,988
1,660
2004 Cost of Available Seat Miles (CASM)
8.42
10.03
9.72
7.81
9.49
10.23
6.03
10.31
7.77
10.16
11.34
21
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
Source
Assemble
Deliver
Area of innovation
22
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
23
SENIOR VS. MIDDLE MANAGERS
Senior
Middle
Decide how to use other resources and capabilities, configure their firm’s value-chain activities, and set the context which determines how front-line and middle managers can add value
Are better positioned than senior managers to contribute to competitive advantage and firm success in four areas• Entrepreneurship• Communications• Psychoanalyst• Tightrope walker
Source: Quy Nguyen Huy
24
SUMMARY
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
Understand how value‑chain activities are related to firm performance and competitive advantage
Explain the role of managers with respect to resources, capabilities, and value‑chain activities