AN
INTERNAL
ORGANISATIONS
What are the SOURCES of COMPETITIVE ADVANTAGE
ENVIRONMENT:
Session 13 on 14 May 2013
SZABIST MBA
Strategic Management Process
Study
the EXTERNAL and INTERNAL environments
Identify
MARKETPLACE OPPORTUNITIES and THREATS
how to use CORE COMPETENCIES
Determine Use
strategic intent to LEVERAGE resources, capabilities and core competencies strategies
Integrate
FORMULATION and IMPLEMENTATION of
Seek
FEEDBACK to improve strategies
Background
Much
of our earlier discussion has focused on looking at the EXTERNAL ENVIRONMENT that has an impact on organisations take a look WITHIN for sources of competitive advantage
Lets
External and Internal Analyses
Examine opportunities and threats
Examine unique resources, capabilities, and competencies (sustainable competitive advantage)
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The Context of Internal Analysis
Effective
analysis of a firms internal environment (learning what the firm can do ) requires:
Fostering an organisational setting in which experimentation and learning are expected and promoted Using a global mind-set Thinking of the firm as a bundle of heterogeneous resources and capabilities that can be used to create an exclusive market position
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Components of Internal Analysis
Why Do an Internal Analysis?
Internal
analysis helps a firm: determine if its RESOURCES and CAPABILITIES are likely SOURCES of competitive advantage
establish
strategies that will EXPLOIT any sources of competitive advantage
Internal
analysis tells the strategist what is inside the organisationhelps answer the question, what STRENGTHS can we LEVERAGE?
Creating Value
By
exploiting their core competencies or competitive advantages, firms create VALUE is measured by A products performance characteristics The products attributes for which customers are willing to pay How much something is deemed important by customers
Value
Firms
create value by innovatively bundling and leveraging their resources and capabilities
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Creating Competitive Advantage
CORE
competencies, in combination with PRODUCT/SERVICE-MARKET POSITIONS, are the firms most important sources of competitive advantage competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should DRIVE its selection of strategies
Core
The Challenge of Internal Analysis
Strategic
decisions in terms of the firms resources, capabilities, and core competencies
Are
non-routine ethical implications [example?]
Have
Significantly
influence the firms ability to earn above-average returns
The Challenge of Internal Analysis (contd)
To
develop and use core competencies, managers must have
Courage Self-confidence Integrity The
capacity to deal with uncertainty and complexity A willingness to hold people (and themselves) accountable for their work
Conditions Affecting Managerial Decisions about Resources, Capabilities and Core Competencies
SOURCE: Adapted from R. Amit & P. J. H. Schoemaker, 1993, Strategic assets and organisational rent, Strategic Management Journal, 14: 33.
Resources, Capabilities and Core Competencies
Resources
Are
the source of a firms capabilities Are broad in scope Cover a spectrum of individual, social and organisational phenomena Alone, do not yield a competitive advantage
Resources, Capabilities and Core Competencies
Resources
Are
a firms assets, including people and the value of its brand name Represent inputs into a firms production process, such as:
Capital equipment Skills of employees Brand names Financial resources Talented managers
Resources, Capabilities and Core Competencies
Resources
Tangible
Financial Physical
resources
resources resources resources
resources
Technological
Organisational
Intangible
Human innovation Reputation
resources
resources resources resources
Tangible Resources
Financial Resources internal The firms borrowing capacity The firms ability to generate funds
Organisational Resources The firms formal reporting structure and its formal planning, controlling and coordinating systems Physical Resources firms Technological Resources Sophistication and location of a plant and equipment Access to raw materials Stock of technology, such as patents, trade-marks, copyrights, and trade secrets
SOURCES: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100102.
Intangible Resources
Human Resources Knowledge Trust Managerial capabilities Organisational routines
Innovation Resources
Ideas Scientific capabilities Capacity to innovate Reputation with customers Brand name Perceptions of product quality, durability, and reliability Reputation with suppliers For efficient, effective, supportive, and mutually beneficial interactions and relationships
Reputational Resources
SOURCES: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13: 136139; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101104.
Resources, Capabilities and Core Competencies
Capabilities
Are the firms capacity to deploy resources that have been purposely integrated to achieve a desired end state Emerge over time through complex interactions among tangible and intangible resources Often are based on developing, carrying and exchanging information and knowledge through the firms human capital
Resources, Capabilities and Core Competencies
Capabilities
The
foundation of many capabilities lies in:
The unique skills and knowledge of a firms employees The functional expertise of those employees
Capabilities
are often developed in specific functional areas or as part of a functional area
Examples of Firms Capabilities
Resources, Capabilities and Core Competencies
Core
Competencies
Resources and capabilities that serve as a source of a firms competitive advantage:
Distinguish a company competitively and reflect its personality Emerge over time through an organisational process of accumulating and learning how to deploy different resources and capabilities
Resources, Capabilities and Core Competencies
Core
Competencies
Activities that a firm performs especially well compared to competitors Activities through which the firm adds unique value to its goods or services over a long period of time
What is Competitive Advantage (CA)?
Competitive
advantage is what sets a company apart from rivals or a companys competitive edge Advantage is attained by: CONTROLLING or HAVING SOMETHING other rivals do not
have; or
Competitive
Doing something BETTER than other organisations can do; or Doing SOMETHING that other organisations CANNOT DO
What is Competitive Advantage?
Competitive
Advantage is a NECESSARY INGREDIENT for an organisations longterm success and survival
True
for for-profit, not-for-profit organisations and government agencies and departments
Building Sustainable Competitive Advantage
Four
Criteria of Sustainable Competitive Advantage
Valuable Rare Costly
to imitate Non-substitutable
The Four Criteria of Sustainable Competitive Advantage
Valuable Capabilities Rare Capabilities Help a firm neutralise threats or exploit opportunities Are not possessed by many others
Costly-to-Imitate Capabilities Historical: A unique and a valuable organisational culture or brand name Ambiguous cause: The causes and uses of a competence are unclear Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers Non-substitutable Capabilities No strategic equivalent
Building Sustainable Competitive Advantage
Valuable
Help
capabilities
a firm neutralise threats or exploit opportunities
Rare
capabilities
Are
not possessed by many others
Building Sustainable Competitive Advantage
Costly-to-Imitate Historical
Capabilities
A unique and a valuable organisational culture or brand name
Ambiguous
cause
The causes and uses of a competence are unclear
Social
complexity
Interpersonal relationships, trust, and friendship among managers, suppliers, and customers
Building Sustainable Competitive
Advantage
Non-substitutable
Capabilities
No
strategic equivalent
The Theory Behind Internal Analysis
The RESOURCE BASED VIEW
DO SOME FIRMS ACHIEVE BETTER ECONOMIC PERFORMANCE THAN OTHERS? used to help firms achieve COMPETITIVE ADVANTAGE and SUPERIOR ECONOMIC PERFORMANCE
developed to answer the question: WHY
assumes that a firms resources and capabilities are the PRIMARY DRIVERS of competitive advantage and economic performance
The Resource Based View
Resources
Resources: TANGIBLE and INTANGIBLE ASSETS of a firm
and Capabilities
tangible: factories, products; intangible: reputation,
Capabilities a subset of resources that enable a firm to TAKE FULL
intellectual property used to conceive of and implement strategies
ADVANTAGE of other resources
Examples: marketing skill, co-operative relationships
The Resource Based View
Two
RBV
Critical Assumptions of the
Resource
HETEROGENEITY: different firms may have different resources or similar resources put together in different ways Resource IMMOBILITY: it may be costly for firms without certain resources to acquire or develop them and some resources may not spread from firm to firm easily
The Resource Based View
What
if
do these assumptions really mean?
one firm HAS resources that are valuable and other firms dont, and if other firms CANT IMITATE these resources without incurring high costs, then the firm possessing these valuable resources will likely gain a sustained competitive advantage
The Resource Based View
Resource Heterogeneity
heterogeneity
of resources typically occurs as the
result of BUNDLING the resources and capabilities of a firm (e.g., bundles of HR practices, e.g., google has specific ones)
managers
of a firm could take resources that seem homogeneous and bundle them to create heterogeneous combinations competitive advantage typically stems from several resources and capabilities bundled together in a unique combination
What are Bundles?
Those particular bundles of resources and capabilities that provide unique advantages to the firm are considered CORE COMPETENCIES Core competencies give a firm competitive advantage over rivals and reflect its PERSONALITY Core competencies emerge over time through
resources and capabilities. Core competencies are crown jewels of any organisation, activities the company PERFORMS
ACCUMULATING and LEARNING how to deploy different
ESPECIALLY WELL compared to competitors and through
which it adds unique value to its goods or services over a [long] period of time
The Internal Analysis Tool
The
VRIO Framework
Important Questions:
FOUR
Value? Rarity? Imitability? Organisation?
The VRIO Framework
If
a firm has resources that are:
VALUABLE, RARE, and
to imitate, and the firm is ORGANISED to exploit these resources
COSTLY
then
the firm can expect to enjoy a sustained competitive advantage
The VRIO Framework
Applying
a
the Tool
resource or bundle of resources is SUBJECTED to each QUESTION to determine the competitive implication of the resource each question is considered in a COMPARATIVE sense and in a COMPETITIVE environment
Applying the VRIO Framework
The
in
Question of VALUE
theory: Does the resource enable the firm to EXPLOIT an external opportunity or NEUTRALISE an external threat? the practical: Does the resource result in an INCREASE in REVENUES, a DECREASE in COSTS, or some COMBINATION of the two? (Levis reputation allows it to charge a premium for its Dockers pants)
Applying the VRIO Framework
The
if
Question of RARITY
a resource is not rare, then perfect competition dynamics are likely to be observed (i.e., NO COMPETITIVE ADVANTAGE, NO ABOVE NORMAL PROFITS)
resource must be rare enough that perfect competition has not set in thus, there may be other firms that possess the resource, but still few enough that there is scarcity (several pharmaceuticals sell cholesterol-lowering
drugs, but the drugs are still scarcelook at prices)
Applying the VRIO Framework: Valuable and Rare
If a firms resources are: Not Valuable Valuable, but Not Rare Valuable and Rare The firm can expect: Competitive Disadvantage Competitive Parity Competitive Advantage (at least temporarily)
Applying the VRIO Framework
The
Question of IMITABILITY
the
temporary competitive advantage of valuable and rare resources can be sustained only if competitors face a COST DISADVANTAGE in imitating the resource INTANGIBLE resources are usually more costly to
imitate than tangible resources (HarleyDavidsons styles may be easily imitated, but its reputation cannot)
Applying the VRIO Framework
The
if
Question of IMITABILITY
there are HIGH COSTS of imitation, then the firm may enjoy a PERIOD of sustained competitive advantage
a
sustained competitive advantage will last only until a DUPLICATE or SUBSTITUTE emerges
if a firm has a competitive advantage, others will attempt to imitate it; some will succeed
Applying the VRIO Framework
The
Question of IMITABILITY
of Imitation
Costs
Unique
HISTORICAL Conditions: an innovative firm gains low-cost access to rare resources in a particular time and space FIRST MOVER advantages PATH dependence - search for new sources
of competitive advantage is path dependent
Applying the VRIO Framework
The
Question of IMITABILITY
of Imitation
AMBIGUITY (Southwest Airlines HR)
links between resources and competitive advantage may not be understood by imitating firm of resources FOG/OBSCURE these causal links
Costs
CAUSAL
causal
bundles
Applying the VRIO Framework
The
Question of IMITABILITY
of Imitation
COMPLEXITY
social relationships entailed in resources may be so COMPLEX that managers cannot really manage them or replicate them
Costs
SOCIAL
the
Applying the VRIO Framework
The
Question of IMITABILITY
of Imitation
Costs
PATENTS
patents
may be a two-edged sword; offer a period of protection if the firm is able to defend its patent rights required disclosure and the timing may actually decrease the cost of imitation
Applying the VRIO Framework
Value,
Rarity, & Imitability
The firm can expect: Temporary Competitive Advantage Sustained Competitive Advantage (if Organised appropriately)
If a firms resources are: Valuable, Rare, but not Costly to Imitate Valuable, Rare, and Costly to Imitate
Applying the VRIO Framework
The
a
Question of ORGANISATION
firms structure and control mechanisms must be aligned so as to give people ability and incentive to exploit the firms resources
examples: formal and informal reporting structures, management controls, compensation policies, relationships, etc. these structure and control mechanisms complement other firm resourcestaken together, they can help a firm achieve sustained competitive advantage (3M, Google)
Summary: The VRIO Framework
Summary: Internal Analysis
Tells
what
Managers
BUNDLE
the firm SHOULD do, given the relative strengths and weaknesses of resources and capabilities
us:
RESOURCES and CAPABILITIES to achieve competitive advantage VRIO Framework helps managers RECOGNISE SOURCES of COMPETITIVE ADVANTAGE
Job:
Common Mistakes
Managers
tend to OVERESTIMATE the TRANSFERABILITY of specific assets and capabilities Managers tend to OVERESTIMATE their CAPABILITY to COMPETE in highly profitable industries [risk-taking vs. being foolish] Managers tend to assume that LEVERAGING GENERIC RESOURCES will be a major source of competitive advantage in a new market
