sm lecture three : strategic capabilities

Strategic Management BUSM 3200

These Lecture Slides summarize the key points covered in the respective chapters in your

recommended text; these slides do NOT substitute, at all, the required reading of the assigned

chapter from the text. These slides also may contain additional supplementary material extracted

from other texts and sources outside your text book.

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Learning outcomes for Chapter Three

Identify what comprises strategic capabilities in terms of

organisational resources and competences and how these

relate to the strategies of organisations.

Analyse how strategic capabilities might provide sustainable competitive advantage on the basis of their value, rarity, inimitability and non-substitutability (VRIN).

Diagnose strategic capability by means of benchmarking, value chain analysis, activity mapping and SWOT analysis.

Consider how managers can develop strategic capabilities for their organisations.


Note:

This lecture focuses on INTERNAL Analysis of a business

It gives you the concepts to assess the capabilities and constraints of a company – simply put it enables you to study its ‘strengths and weaknesses’

Taken together with the material from Lecture Two (external environment), you can then proceed to complete the overall SWOT analysis of the company.


Strategic capabilities: the key issues

Figure 3.1 Strategic capabilities: the key issues


Resource-based strategy

The resource-based view (RBV) of strategy asserts that the competitive advantage and superior performance of an organisation is explained by the distinctiveness of its capabilities.

Proponents of the RBV contend that organizational performance will primarily be determined by internal resources that can be grouped into three all-encompassing categories: physical resources, human resources, and organizational resources.

(think of the functional divisions such as marketing, finance, HR and operations;

where does the key strengths of the company lie in? )


Resources and competences

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 do well’.


Components of strategic capabilities

Table 3.1 Components of strategic capabilities


Redundant capabilities

Capabilities, however effective in the past, can become less relevant as industries evolve and change.

Such ‘capabilities’ can become ‘rigidities’ that inhibit change and become a weakness.

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(Consider the case of Nokia: a leader in the past but now reduced to being a lost follower in the mobile phone market)

BUSM 3200- Strategic Management (Jan 2013) GDS

Dynamic capabilities

Dynamic capability is the ability of an organisation to renew and recreate its strategic capabilities to meet the needs of changing environments.

Three types of capabilities:

• Sensing opportunities and threats

• Seizing new opportunities

• Reconfiguring the capabilities of the organization


Threshold and distinctive capabilities (1)

Threshold capabilities are those needed for an organisation to meet the necessary requirements to compete in a given market and achieve parity with competitors in that market – ‘qualifiers’.

Distinctive capabilities are those that critically underpin competitive advantage and that others cannot imitate or obtain – ‘winners’.


Threshold and distinctive capabilities

Table 3.2 Threshold and distinctive capabilities


Core competences

Core competences1 are the linked set of skills, activities and resources that, together:

deliver customer value

differentiate a business from its competitors

potentially, can be extended and developed as markets change or new opportunities arise.

1G. Hamel and C.K. Prahalad, ‘The core competence of the corporation’, Harvard Business Review, vol. 68, no. 3 (1990),

pp. 79–91.


Core competences

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Core competences are distinguished from competences

in several ways:

• they are only possessed by those companies

whose performance is superior to the industry

average;

• they are unique to the company;

• they are more complex;

• they are difficult to emulate (copy);

• they relate to fulfilling customer needs;

• they add greater value than 'general' competences;

• they are often based on distinctive relationships

with customers, distributors and suppliers;

• they are based upon superior organisational skills

and knowledge.


Strategic capabilities and competitive advantage

The four key criteria by which capabilities can be assessed in terms of providing a basis for achieving sustainable competitive advantage are:

value,

rarity,

inimitability and

non-substitutability

Source: Jay Barney: ‘Firm resources and sustained competitive advantage’, Journal of Management, vol. 17 (1991), no.

1, pp. 99–120.

VRIN


VRIN (1)

V – Value of strategic capabilities Strategic capabilities are of value when they:

take advantage of opportunities and neutralise threats,

provide value to customers

provide potential competitive advantage

at a cost that allows an organisation to realise acceptable levels of return


VRIN (2)

R – Rarity Rare capabilities are those possessed uniquely

by one organisation or by a few others only. (E.g. a company may have patented products, have supremely talented people or a powerful brand.)

Rarity could be temporary.

(Eg: Patents expire, key individuals can leave or brands can be de-valued by adverse publicity.)


VRIN (3)

I – Inimitability Inimitable capabilities are those that competitors find difficult to imitate or obtain.

Competitive advantage can be built on unique resources (a key individual or IT system) but these may not be sustainable (key people leave or others acquire the same systems).

Sustainable advantage is more often found in competences (the way resources are managed, developed and deployed) and the way competences are linked together and integrated.


Criteria for the inimitability of strategic capabilities

Figure 3.2 Criteria for the inimitability of strategic capabilities

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Read the explanation of

these four components on

pages 92-93 of the text.


VRIN (4)

N - Non-substitutability Competitive advantage may not be sustainable

if there is a threat of substitution.

Product or service substitution from a different industry/market. For example, postal services partly substituted by e-mail.

Competence substitution. For example, a skill substituted by expert systems or IT solutions


Summary of the VRIN Factors:

Figure 3.3 VRIN


Organisational knowledge

Organisational knowledge is the collective intelligence, specific to an organisation, accumulated through both formal systems and the shared experience of people in that organisation.

Some of this knowledge is ‘Tacit’ knowledge that is, more personal, context-specific and hard to formalise and communicate – so it is difficult to imitate, for example, the knowledge and relationships in a top R&D team.


Diagnosing Strategic Capabilities

Several techniques and frameworks are used to assess a company’s strategic capabilities:

1. Benchmarking

2. Value Chain and Value Networks

3. Activity Systems

4. SWOT Analysis


Benchmarking

Benchmarking is a means of understanding how an organisation compares with others – typically competitors.

Two approaches to benchmarking: Industry/sector benchmarking - comparing

performance against other organisations in the same industry/sector against a set of performance indicators.

Best-in-class benchmarking - comparing an organisation’s performance or capabilities against ‘best-in-class’ performance – wherever that is found even in a very different industry. (E.g. BA benchmarked its refuelling operations against Formula 1).


The value chain

The value chain describes the categories of activities within an organisation which, together, create a product or service.

The value chain invites the strategist to think of an organisation in terms of sets of activities – sources of competitive advantage can be analysed in any or all of these activities.


4–25 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

The Concept of a Company Value Chain

♦ The Value Chain

● Identifies the primary internal activities that create

customer value and the related support activities.

● Permits a deep look at the firm’s cost structure and

ability to offer low prices.

● Reveals the emphasis that a firm places on

activities that enhance differentiation and support

higher prices.

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Using the VC model, the form can analyze its INTERNAL

OPERATIONS and identify specific areas of efficiencies and

core competences.

The Value Chain (Porter)

Figure 3.4 The value chain within an organisation Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance

by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved


Read up in detail

The description of EACH of the activities of the Value Chain on page 968.

Understand the difference between primary and support activities

Importance of VC:

Used to do an internal analysis of business operations

Discover where the capabilities lie. Those inefficient functions should be ‘outsourced’

To analyze the value chains of other related organizations and identify areas of integration. Develop better linkages in order to create efficiencies


Uses of the value chain

A generic description of activities – understanding the discrete activities and how they both contribute to consumer benefit and how they add to cost.

Identifying activities where the organisation has particular strengths or weaknesses

Analysing the competitive position of the organisation using the VRIN criteria – thus identifying sources of sustainable advantage.

Looking for ways to enhance value or decrease cost in value activities (e.g. outsourcing)

See page 99 of text


The value network

The value network comprises the set of inter-organisational links and relationships that are necessary to create a product or service.

Competitive advantage can be derived from linkages within the value network.

(implication in strategic analysis: we don’t only look at our own company VC but also the linkages between the other organizations that do business with our firm – suppliers and distributors)


The value network

Figure 3.5 The value network Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance

by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved


Uses of the value network

Understanding cost/price structures across the value network – analysing the best area of focus and the best business model .

Identifying ‘profit pools’ within the value network and seek to exploit these.

The ‘make or buy’ decision: deciding which activities to do ‘in-house’ and which to outsource.

Partnering and relationships – deciding who to work with and the nature of these relationships.



Strategic Options for Remedying a Disadvantage in Costs or Effectiveness

♦ There are three places in the total value

chain system for a company to look for

ways to improve its efficiency and

effectiveness:

● The firm’s own activity segments

● The suppliers’ part of the overall value chain

● The distribution channel portion of the chain.

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Representative Value Chain System for an Entire Industry

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Some additional slides on how VC analysis is applied to

study the linkages between the firm and its allied

partners such as suppliers and distributors


Options for Improving the Efficiency and Effectiveness of Internal Value Chain Activities

♦ Implement best practices throughout the company, particularly for

high-cost activities.

♦ Redesign products to eliminate high-cost components or facilitate

speedier and more economical assembly or manufacture.

♦ Relocate high-cost activities to areas where they can be

performed more cheaply.

♦ Outsource activities that can be performed by contractors more

cheaply than in-house.

♦ Shift to lower-cost technologies and/or invest in productivity-

enhancing, cost-saving technological improvements.

♦ Stop performing activities that add little or no customer value.

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Ways to Improve the Efficiency and Effectiveness of Supplier-Related Value Chain Activities

♦ Pressure suppliers for lower prices.

♦ Switch to lower-priced substitute inputs.

♦ Collaborate closely with suppliers to identify mutual cost-saving

opportunities.

♦ Work with suppliers to enhance the firm’s differentiation.

♦ Select and retain suppliers who meet higher-quality standards.

♦ Coordinate with suppliers to enhance design or other features

desired by customers.

♦ Provide incentives to suppliers to meet higher-quality standards,

and assist suppliers in their efforts to improve.

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Ways to Improve the Effectiveness of the Customer Value Proposition and Enhance Differentiation

♦ Implement best practices throughout the company, particularly

for high-cost activities.

♦ Adopt best practices and technologies that spur innovation,

improve design, and enhance creativity.

♦ Implement the best practices in providing customer service.

♦ Reallocate resources to devote more to activities that will have

the biggest impact on the value delivered to the customer and

that address buyers’ most important purchase criteria.

♦ For intermediate buyers, gain an understanding of how the

activities the firm performs impact the buyer’s value chain.

♦ Adopt best practices for signaling the value of the product and

for enhancing customer perceptions.

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Translating Company Performance of Value Chain Activities

into Competitive Advantage

Later in our lecture on Business Strategy (Chapter 6) we will show

how the VC is linked to the strategy of Differentiation (Porter)

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Differentiation Advantage


Translating Company Performance of Value Chain Activities

into Competitive Advantage (cont’d)

Later in our lecture on Business Strategy (Chapter 6) we will show

how the VC is linked to the strategy of Cost Leadership (Porter)

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Cost-Based Advantage

Mapping activity systems (1)

Identify ‘higher order strategic themes’ that is, how the organisation meets the critical success factors in the market.

Identify the clusters of activities that underpin these themes and how they fit together.

Map this in terms of how activity systems are interrelated.


Mapping activity systems (2)

Illustration 3.5 Activity systems at Geelmuyden.Kiese


Using activity system maps

A means of identifying strategic capabilities in terms of linkages of activities

Internal and external links are identified (e.g. in terms of the needs of customers).

Therefore helps identify bases of competitive advantage.

And sustainable advantage for example, in terms of bases of inimitability.


SWOT analysis

SWOT summarises the strengths, weaknesses, opportunities and threats likely to impact on strategy development.

INTERNAL STRENGTHS WEAKNESSES

ANAYSIS

EXTERNAL OPPORTUNITIES THREATS

ANALYSIS

Derived from PESTEL and

Industry Analyses



IS THE COMPANY ABLE TO SEIZE MARKET OPPORTUNITIES AND NULLIFY EXTERNAL THREATS? THE SWOT ANALYSIS

♦ SWOT Analysis

● Is a powerful tool for sizing up a firm’s:

Internal strengths (the basis for strategy)

Internal weaknesses (deficient capabilities)

Market opportunities (strategic objectives)

External threats (strategic defenses)


What Do the SWOT Listings Reveal?

♦ SWOT Analysis Involves:

● Drawing conclusions from the SWOT

listings about the firm’s overall situation.

● Translating these conclusions into

strategic actions by the firm that:

Match its strategy to its internal

strengths and to market opportunities.

Correct important weaknesses, and

defend it against external threats.


The Steps Involved in SWOT Analysis: Identify the Four

Components of SWOT, Draw Conclusions, Translate Implications

into Strategic Actions

Remember:

SWOT Listing is NOT SWOT Analysis

“So What?” Implications

What do the SWO and T factors mean? Which are more critical? And what should the company do about such factors?

Just like the external variables (refer to my Lecture Two), we can also quantify the internal variables

External we used EFE and CPM Matrices

For Internal Factors we can use the IFE (internal factor evaluation) matrix


SWOT analysis: Illustration 3.6 (page 107)

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In this illustration from the text, the SWOT analysis is more complex. Here the company

matches the different S&W factors against the external O and T factors. Notice how

contextual the points are (all specific to the pharmaceutical industry). This is how a good

SWOT analysis should be.


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SWOT analysis: Illustration 3.6 (page 107) This continuation version of the SWOT analysis shows a second stage analysis

where the firm compares its performance to those of its direct competitors.


Uses of SWOT analysis

Key environmental impacts are identified using the analytical tools explained in Chapter 2.

Major strengths and weaknesses are identified using the analytic tools explained in Chapter 3.

Scoring (e.g. + 5 to - 5) can be used to assess the interrelationship between environmental impacts and the strengths and weaknesses.

SWOT can be used to examine strengths, weaknesses, opportunities and threats in relation to competitors.

SWOT can be used to generate strategic options– using a TOWS matrix.


The TOWS matrix

Figure 3.6 The TOWS matrix

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This model is an extension of the SWOT analysis.

What is done here is to consider possible strategies

arising from the fit between internal and external

factors


Sample of a TOWS matrix

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Try to Google more samples of TOWs matrices


Dangers in a SWOT analysis

Long lists with no attempt at prioritisation.

Over generalisation – sweeping statements often based on biased and unsupported opinions.

SWOT is used as a substitute for analysis – it should result from detailed analysis using the frameworks in Chapters 2 and 3.

SWOT is not used to guide strategy – it is seen as an end in itself.


Managing Strategic Capability

Internal capability development:

Leveraging capabilities – identifying capabilities in one part of the organisation and transferring them to other parts (sharing best practice).

Stretching capabilities - building new products or services out of existing capabilities.


Managing activities for capability development

External capability development – adding capabilities through mergers, acquisitions or alliances.

Ceasing activities – non-core activities can be stopped, outsourced or reduced in cost.

Monitor outputs and benefits – to understand sources of consumer benefit and enhance anything that contributes to this.

Managing the capabilities of people – training, development and organisation learning.


Managing people for capability development

Targeted training and development

Staffing policies

Organizational learning

Developing people’s awareness of their importance of the roles they play in the organization


The Process of Performing an

Internal Audit

The internal audit

Requires gathering and assimilating

information about the firm’s management,

marketing, finance/accounting,

production/operations, research and

development (R&D), and management

information systems operations

Provides more opportunity for participants to

understand how their jobs, departments, and

divisions fit into the whole organization

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One area not covered in the text is the “auditing” or

internal assessment of the key business functions in the

organization


Marketing Audit Checklist

of Questions

1. Are markets segmented effectively?

2. Is the organization positioned well among

competitors?

3. Has the firm’s market share been increasing?

4. Are present channels of distribution reliable and

cost effective?

5. Does the firm have an effective sales

organization?

6. Does the firm conduct market research?

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Marketing Audit Checklist

of Questions

7. Are product quality and customer service good?

8. Are the firm’s products and services priced

appropriately?

9. Does the firm have an effective promotion,

advertising, and publicity strategy?

10. Are marketing, planning, and budgeting effective?

11. Do the firm’s marketing managers have adequate

experience and training?

12. Is the firm’s Internet presence excellent as

compared to rivals?

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Finance/Accounting Audit

Checklist

1. Where is the firm financially strong and weak

as indicated by financial ratio analyses?

2. Can the firm raise needed short-term capital?

3. Can the firm raise needed long-term capital

through debt and/or equity?

4. Does the firm have sufficient working capital?

5. Are capital budgeting procedures effective?

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Finance/Accounting Audit

Checklist

7. Are dividend payout policies

reasonable?

8. Does the firm have good relations with

its investors and stockholders?

9. Are the firm’s financial managers

experienced and well trained?

10.Is the firm’s debt situation excellent?

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Key Financial

Ratios

How Calculated

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Key Financial

Ratios (cont’d)

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Production/Operations

Audit Checklist

1. Are supplies of raw materials, parts, and

subassemblies reliable and reasonable?

2. Are facilities, equipment, machinery, and offices in

good condition?

3. Are inventory-control policies and procedures

effective?

4. Are quality-control policies and procedures effective?

5. Are facilities, resources, and markets strategically

located?

6. Does the firm have technological competencies?

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Integrating Strategy and Culture

Organizational culture significantly affects

business decisions and thus must be

evaluated during an internal strategic-

management audit.

If strategies can capitalize on cultural

strengths, such as a strong work ethic or

highly ethical beliefs, then management

often can swiftly and easily implement

changes.

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We cover the topic of Corporate

Culture in Lecture 4 (Chapter 5) BUSM 3200- Strategic Management (Jan 2013) GDS

Chapter summary (1)

• Strategic capabilities comprise both resources and

competences.

• The concept of dynamic capabilities highlights that

strategic capabilities need to change as the market

and environmental context of an organisation

changes.

• Sustainability of competitive advantage is likely to

depend on an organisation’s capabilities being of at

least threshold value in a market but also being

valuable, relatively rare, intimable and non-

substitutable.


Chapter summary (2)

Ways of diagnosing organisational capabilities include:

Benchmarking as a means of understanding the relative performance of organisations.

Analysing an organisation’s value chain and value network as a basis for understanding how value to a customer is created and can be developed.

Activity mapping as a means of identifying more detailed activities which underpin strategic capabilities.

SWOT analysis as a way of drawing together an understanding of strengths, weaknesses, opportunities and threats an organisation faces.


PRACTICE ESSAY QUESTIONS

IMPORTANT NOTE: →

These questions are provided for your reference only – they are only INDICATIVE of the standard of questions you might expect in the final exam.

DO NOT use these questions to “spot”

The RMIT examiner will post advice on the exam on the Learning Hub closer to the exam; you are required to pay attention to that advise

The questions here show the range of topics that could be tested from this lecture; they are NOT exhaustive

To score a high grade it is important to LINK the theory to applications and examples. Where from?

You have been assigned specific cases to read from the text. Each case study will show you the kinds of strategic decisions the case company needs to make. You can draw from these examples.

You have selected a case company for your project; you may use examples from there.

You are supposed to read widely from the business press about local, regional and international companies strategies. You can use examples from there as well.


Sample Exam Question

According to the resource based view of the firm, there are four attributes resources a firm needs to have if they are going to provide it with a sustainable competitive advantage.

Explain how these can give a firm a sustainable competitive advantage. Give an example of each to support your answer.

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VRIN Hint:



Describe the four criteria for an organization’s core competence. Explain how core competences can be identified and leveraged to develop strategies. Give examples to support your argument.

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VRIN BUSM 3200- Strategic Management (Jan 2013) GDS


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Examine the advantages and disadvantages for a firm to rely on the Value Chain to achieve sustainable competitive advantage with a cost leadership strategy. Use examples from the ___ case to illustrate your answer.

Note: this question is not about discussing the Value

Chain by itself. It requires you to LINK the VC model to

discussion on one of the Business Strategies (cost

leadership). We cover the topic of business strategies

in a later lecture.

In the meantime take note of how exam questions

require you to analyze and write across the different

topics.


sm lecture three : strategic capabilities

Documents

sustaining superior performance

sample exam question

mapping activity systems

sustainable competitive advantage

marketing audit checklist

translating company performance

activity mapping

key financial