Strategic management 3

Resource analysis, value chain, and

strategic competences
Figure 4.1 Analysing strategic capability

Resource audit

Competences
In separate activities
Through linking activities

Some are ...

Core competences
Rigidities Comparisons
To outperform competition Historical
Preventing
To create new opportunities Industry norms
change
Benchmarking

Assessing balance
Resources
Competences
Business units

Identifying key issues

SWOT analysis
Critical success factors

Understanding strategic
capability
 Identify core resources, competences

Resource Audit Audit Competences

Identify core resources Identify core competences

Strategic capabilities

Comparisons

Historical basis Industry Norms Benchmarking

Identifying kes issues

SWOT Analysis
 Audit resources- core resources 1.

The resource audit identifies the resources „available” to an organisation in supporting

its strategies both from within and outside the organisation

Resources can be grouped

Physical resources Human resources Financial resources Intangibles

•
• Material assets • Number of employees • Equity • Goodwill
• Immobility • Skills • Debt • Loyalty of consumers
• Machines • Education • Credibility • Brand name
• Others • Experience • Relationship with • Good contacts with
• Current assets • Loyalty • Suppliers • Politicians
• Inventory •Corporate culture • Investors • CEOs
• Nature of assets • Bankers • Corporate image
• age • Managing cash
• condition
• location
 Analysing competences and core competences 1.

The competence undertake the activities of the organisation. It shows how to link the
different activities together and how to deploy resources to sustain excellent performance

Bases of
competences

Economies of scale: offers the ability in mass consumer advertising,

Cost efficiency
Supply costs: well managed input costs, with IT or personal networks
Experience: the cumulative experience decrease the R+D and unit costs

How well are matched the products/services to the identified needs of the
Value added
chosen customers. Value added activity must be done from the viewpoint
of the customer or user of the production or service.

Competences are likely to be more robust and difficult to imitate if there

Managing linkages
are linkages within the organisation’s value chain and linkages into the
supply and distribution channels.

Robustness The strategic importance of an organisation’s competences relates to how

easy or difficult they are to imitate.
 The Value Chain

Exhibit 3.6
Figure 4.5 The value system

Supplier Channel Customer

value chains value chains value chains

Organisation's
value chain

Source: Adapted from M. E. Porter, Competitive Advantage, Free Press, 1985.

Used with permission of The Free Press, a division of Macmillan, Inc Copyright 1985 Michael E. Porter
Figure 4.6 How core competences change over time: the world automobile industry

Market access
Global network
Overseas plants

Quality/Reliability
Production processes
Supplier management

Product features
(at low volume)
Life-style niche marketing
'Agile' production

??
Source: Based on G. Hamel and A. Heene (eds.), Competence-based Competition, Wiley, 1994, pp 16-18.
 Strategic Capability - Outline
 Resources, competences and dynamic
capabilities
 Continual improvement in cost efficiency
 Strategic capabilities and competitive
advantage
 Organisational knowledge and strategic
capability
 Diagnosing strategic capability: value chain,
value networks, activity maps,
benchmarking
 Developing strategic capabilities
 Fit and Stretch (1)
 Chapter 2
• External environment
• Opportunities and threats
 Chapter 3
• Internal strategic capability
• Strengths and weaknesses
 Matching strategic capabilities to
opportunities in environment
• Strategic fit
 Fit and Stretch (2)
OR
 Leveraging strategic capabilities for
competitive advantage
• Strategic stretch
 Resource-based View of
Strategy
 Competitive advantage derives from the
distinctiveness of an organisation’s
capabilities
• 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
 Strategic Capability (1)
Strategic
Strategic capability
capability is
is thethe adequacy
adequacy and
and suitability
suitability
of
of the
the resources
resources and and competences
competences ofof an
an
organisation
organisation for
for itit to
to survive
survive and
and prosper
prosper

 Resources
• Tangible resources – physical assets of
an organisation
• Intangible resources – non-physical
assets of an organisation
 Strategic Capability (2)
 Competences
• The activities and processes through
which an organisation deploys its
resources effectively
 Strategic Capabilities and
Competitive Advantage

Exhibit 3.1
 Resources
 Physical resources
• Machines, buildings, production capacity
 Financial resources
• Capital, cash, debtors/creditors, suppliers
of money (shareholders, bankers etc)
 Human resources
• Number and mix of people, skills and
knowledge
 Intellectual capital
• Patents, brands, business systems,
customer databases, “goodwill”
 Strategic Capability- the terminology

Exhibit 3.2
 Strategic Capability Terminology

Strategic Ability to perform at level required to

survive and prosper. Underpinned by
capability resources and competences

Threshold Resources needed to meet customers’

minimum requirements. Needed to
resources continue to exist

Threshold Activities and processes needed to meet

customers’ minimum requirements.
competences Needed to continue to exist

Unique Resources underpinning competitive

advantage. Difficult for competitors to
resources imitate or obtain.

Core Activities underpinning competitive

advantage. Difficult for competitors to
competences imitate or obtain
Adapted from Exh. 3.2
 Competences
 How an organisation employs and
deploys its resources
 Efficiency and effectiveness of physical,
financial, human and intellectual
resources
• How they are managed
• Cooperation between people
• Adaptability
• Innovation
• Customer and supplier relationships
• Learning
 Threshold Capabilities (1)
 Threshold capabilities: those essential
to compete in a given market
• Required to be “in the game”
 Threshold levels change over time
• changes in CSFs, new entrants, competitor
activity
 Tradeoffs to achieve threshold capability
for different customers
• high volumes of standard products versus
high value specialities
 Threshold Capabilities (2)
 Possible redundancy of capabilities
• Can be difficult to dispose of
 Complementary resources and
competences
• Competences required to manage the
resources
 Unique Resources and
Core Competences
 Unique resources
• Critically underpin competitive advantage and
cannot be imitated or obtained by others
 Core competences
• Activities and processes through which
resources are deployed such as to achieve
competitive advantages in ways which others
cannot imitate or obtain
 Cost Efficiency (1)
 Customers benefit from cost
efficiency via
• Lower prices
• More product features for the same
price
 Cost management can create
competitive advantage
But
 Cost Efficiency (2)

 Cost management may become a

threshold capability:
• Customers do not buy at any price –
need appropriate value at acceptable
price
• Competitive rivalry requires continual
cost reduction
 Sources of Cost Efficiency

Exhibit 3.3
 The Experience Curve

Exhibit 3.4
 Implications of the Experience
Curve (1)
 Growth not optional
• Longer experience means lower costs
• Threat of competitors gaining cost
advantages
 Real unit costs should decline each
year
 First mover advantage can be
important
• Accumulated experience
 Implications of the Experience
Curve (2)
But
 Sustained competitive advantage unlikely
due to unachievable market share
Therefore
 Cost reduction becomes a threshold
competence
 Outsourcing may become appropriate
 Capabilities for
Sustainable Competitive
Advantage
 Value
 Rarity
 Robustness
 Non-substitutability
 Dynamic capabilities
 Capabilities for
Sustainable Competitive
Advantage (1)
 Value
• Ability to deliver what the customer values
 Rarity
• Unique resources, rare competences
 Who owns the competence and how easily
transferable is it?
 Preferred access to customers/suppliers
 Situation dependent/non-transferable
 Sunk costs
 Capabilities for
Sustainable Competitive
• Rarity
Advantage (2)
– Danger of becoming core rigidities
• Difficult to change
• Can lead to strategic drift
 Capabilities for
Sustainable Competitive
 Robustness Advantage
• Complexity
• Culture and history
• Causal ambiguity
 Non-Substitutability
• Risk of substitution
 At product/service level by other products or
services
 At competence level by a different approach
 Capabilities for Sustainable
Competitive Advantage -
Robustness

Exhibit 3.5
 Dynamic capabilities

 Sustainable competitive advantage is

achieved by
• developing durable strategic capabilities that
provide advantage over time
 In rapidly changing environments emphasis
is placed on
• Organisational capability to change, innovate,
be flexible, adapt and learn
 Organisational Knowledge
 Knowledge
• is the awareness, consciousness or
familiarity gained by experience of
learning
 Organisational knowledge
• is the collective and shared experience
accumulated through systems, routines
and activities of sharing across the
organisation
 Organisational Knowledge (1)
 Sharing of knowledge and experience
is a social process
 Knowledge exchange requires trust
 Explicit knowledge – codified and
objective, transmitted in formal
systematic ways
 Tacit knowledge – personal, context-
specific, hard to formalise and
communicate
 Organisational Knowledge (2)
 IT facilitation of knowledge sharing is
of limited benefit
 The more formal and systematic the
system, the greater the danger of
imitation
Value Chain and Value Network

 To diagnose strategic capability

 To understand how value is created or lost
in terms of the activities undertaken

The
The value
value chain
chain describes
describes the
the activities
activities within
within
and
and around
around an
an organisation
organisation which
which together
together
create
create aa product
product or
or service
service
 Value Chain Analysis
 Identifies clusters of activities providing
particular benefit to customers
 Highlights activities which are less
efficient and which might be de-
emphasised or outsourced
 Requires managers to think about the
role of such activities
 Can be used to identify the cost and
value of activities
 The Value Network

Source: M.E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 1985. Used with
permission of The Free Press, a division of Simon & Schuster Inc. © 1985, 1988 by Michael E. Porter. All rights reserved.

Exhibit 3.7
 The Value Network
 The value network
• Set of inter-organisational links/relationships
necessary to create a product or service
 Specialisation of roles
• Underpins excellence in creating best-value
products
 Need to understand whole process
• Where cost/value is created in supply/distribution
chains
• How to manage links to improve customer value
• How product quality is a function of linked
activities of manufacturer, suppliers and
distributors
 The Value Network – Key
Questions (1)
 Where are cost and value created?
 Which activities are vital to an organisation?
• Retain direct control of core capabilities
• Outsource less important activities
 Where are the profit pools?
• Potential profits at different parts of the value
network
• Availability of competences to compete in these
areas
 The Value Network – Key
Questions (2)
 Make or buy?
• Outsourcing
• Develop competence in influencing performance
of other organisations
 Who are the best partners?
• What kind of relationships are required?
 An Activity System Map

Exhibit 3.8
 Activity Maps

 Identify critical success factors

 Identify higher order strategic
themes
 Unpack the themes by identifying the
underpinning resources
 Benchmarking Strategic
Capability
• Historical – performance compared to
previous years
• Industry/sector – comparative performance
of other organisations
• Best in class – wider search for best practice
 Increased expectations due to improved
performance in another sector
 Breaking the frame about performance standards
to be achieved
 Spot opportunities to outperform incumbents in
other markets – stretch core competences
 SWOT (1)
 Summarises analysis of
• Business environment
 Opportunities and threats
• Strategic capabilities
 Strengths and weaknesses
 Used for comparison with competitors
 Focuses on future choices and
capability of organisation to support
them
 SWOT (2)
 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
 Knowledge Creation Processes

Source: I. Nonaka and H. Takeuchi, The Knowledge-Creating Company, Oxford University Press Inc., © 1995.
Reprinted by permission of Oxford University Press.

Exhibit 3.9
 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 non-
substitutable
 Dynamic capabilities are needed in a changing
environment
 Value chain/value network/activity mapping to
understand cost and value creation
 Strategic Capability – Key
Points (2)
 Benchmarking establishes relative
performance and challenges assumptions
 Management of strategic capabilities
involves stretching capabilities and building
dynamic capabilities