The Internal Assessment

LECTURE 11

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Michael Porter: strategy guru

•What is strategy? (and what it isn’t)

• http://www.youtube.com/watch?v=ibrxIP0H84M

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The big question and how have people thought
about it? (1)
• The enduring big question: what factors explain
differential corporate success? Or, what are the main
sources of competitive advantage?

• Jay Barney on what is strategic management (a

resource based view of strategy)
http://www.youtube.com/watch?v=-KN81_oYl1s&feat
ure=related
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Big question (2) Different answers to the enduring
question: key figures & positions in classical strategy
Emphasis on strategy and sources of advantage:
(1) External environment - Michael Porter (1980 + 1985): firm in
industry/ strategy as environmental fit
(2) Internal capabilities - Resource Based Theory e.g., Prahalad and
Hamel (1990) or Jay Barney; strategy based on internal resources
From top-down control to bottom-up creativity

New ideas in strategy reflect major economic developments

(especially in the US) i.e., the challenges & opportunities are
different in the 1960s, 1980s, 2010s, 2020s…. 4
The case for a RBV/ RBT
• Observation: heterogeneity i.e., different performance by firms in the same
industry
• Contrast to Porter’s ideas about the relative attractiveness of industries
(according to 5 forces) which would suggest firms in same industry have similar
profitability
• Focus: the firm, not the industry, at the centre of strategy formulation. Need to
look inside the firm to find the key drivers of strategy. Not about positioning.
• Focus: the firm, not the business unit or division. Allows identification of core
competencies (from which new products and services will emerge). P&H discuss
problem of managers ‘trapped in the strategic business unit mindset’
• Focus: core competencies (resources) not products. Organisations as ‘repositories
of skills rather than portfolios of products’ 5
The nature of competitiveness has changed?

• Cost and quality no longer the source of competitiveness

-> instead derived from core competencies
• ‘management’s ability to consolidate corporate-wide
technologies and production skills into competencies
that empower individual businesses (within the
corporation) to adapt quickly to changing opportunities’
• Underlying concern that US firms losing out to Asian
rivals, who do things differently (& better) 6
Strategy as resources or capabilities: Resource Based Theory

Post 1990 development: response to new threats (especially to US firms)

Why is this 'resource based’ theory?
• Management task = develop internal or acquire external resources
which can’t be imitated and which increase performance
• Confusion regarding terminology e.g., 'core competence’, 'core
capabilities’, 'strategic assets’, 'dynamic capabilities'
 'Soft RBT' of strategy professors e.g., Prahalad and Hamel (method =
cases)
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‘Soft’ Resource based theory/ view

• Key authors: Prahalad & Hamel (1990 Harvard Business Review)

• Founding assumption: the divisions are a problem because they impede access
to 'collective learning in the organization'
 Divisions lock up human and other capital e.g., 'if HP knew what HP knows, we
would be three times as profitable' (Lew Platt CEO)
 Divisions have bias towards incremental innovation i.e., 'marginal product line
extensions or geographic expansions' not the radical innovation of new
markets
• Framed by problems with Japanese in autos, consumer electronics etc i.e., US
period-specific concerns from late 1980s
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What is a resource?
• Something that the firm has developed or acquired that is distinctive, which
can be used to develop strategies that improve its efficiency or
attractiveness to customers: i.e., to generate higher economic rents for the
same investment.
• Comparative focus: emphasises differences between organisations
Resources include (according to some authors):
• strategic resources: provide a significant benefit (Barney: valuable,
inimitable, rare, non-substitutable); can be a source of competitive
advantage; competitors do not have and can be difficult to acquire.
• threshold resources: resources that an entity needs in order to participate in
the industry and compete in the market; help meet criteria for survival 9
Grant (2001): synthetic approach to RBV/ RBT

• Resources as inputs into the production system; the basis for

corporate profitability (resources allow rents to be earned, but
need capabilities too)
• Resources can be tangible and intangible (hence often difficult
to identify)
• Capabilities are what firms can do by utilising and organising
resources; strategy should focus on developing capabilities
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Examples of competencies from Prahalad & Hamel

• Sony: ‘miniaturization’ – combines technology,

engineering and marketing to understand technology
possibilities and customer needs
• 3M: ‘sticky tape’
• Canon: optics, imaging and microprocessor controls
• Black & Decker: ‘small electric motors’
• Honda: engines
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Distinguishing a core competence

1) Provides access to a wide variety of markets

2) Makes a significant contribution to perceived customer
benefits of the end product
3) Difficult for competitors to imitate (e.g., ‘a complex
harmonization of individual technologies and production
skills’)
• Few companies would have more than 5 or 6 competencies
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Core competencies, core products

• Core products as ‘the physical embodiments of one or more competencies’

e.g., Honda’s engines (not necessarily the same as ‘end products’)
• Aim is to maximise world share in core products
• ‘by focusing on competence and embedding it in core products, Asian
competitors have built up advantages in component markets first and have
then leveraged off their superior products to move downstream to build
market share’
• Previous strategy concepts have focused too much on end products and
ignored core products and competencies
• See P&H for idea that competences are the roots of the organisation...
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Why Sony did not invent the iPod FT 4th Sept 2012
• A decade ago Apple launched the iPod with the slogan “1,000 songs in your pocket”.
The claim encapsulated seamless integration of content and delivery. The launch of
the iPod mattered not just for what it did, but for what it implied for the future. The
age of the personal computer was ending, giving way to an era in which a single
handheld device would be the gateway to every service that could be delivered
electronically.
• So why didn’t Sony do it? The company created the Walkman, the analogue
predecessor to the iPod. For a generation, Sony was the world’s most successful
consumer electronics company. It developed a vision of integration of devices and
content long before Apple dreamt of going into the music business. The route Sony
followed was acquisition. In 1987, Sony bought CBS records. Two years later the
company purchased Columbia Pictures.
• Sony had seen the future. And it worked, but not for them. Apple went on to
dominate the new markets, transforming itself from a computer company into both a
leading consumer electronics company and a major retailer. Sony didn’t even come
close. 14
Example of strategy
Comment on Sony’s announcement about its (new) strategy (FT
25/09/05):
• ‘the new chief executive aims to build on the strategy of previous
management to use content as a way to drive electronics sales…
• ‘The strategy of fusing content with hardware has been central to Sony
ever since it acquired Columbia Pictures, now Sony Pictures
Entertainment, in 1989. But the recent dismal performance of Sony's
electronics division has raised questions about whether it might be
better to focus on either hardware or software.’
• A strategy that can be explained in a sentence: using its resources. But
apparently there are questions about whether it is likely to work

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A new challenge for a new CEO at Sony
• ‘Stringer has to convince skeptical insiders and outside investors that its warring fiefdoms can
finally be quelled and forced into a coherent company. If not, a growing pool of non-Japanese
investors may simply insist on unlocking the value of Sony's parts through some sort of
breakup. Insiders say a stock sale of Sony's Hollywood studio is already a live issue within the
company. Stringer vows instead that, on his watch, Sony will finally achieve the long-promised
magic of convergence between its disparate entertainment and consumer-electronics units. If
this company were American and not Japanese, the board of directors would probably have
forced a drastic solution a long time ago.
• There's no doubt Sony has the most enthralling assets of any entertainment company. But even
Sir Howard admits that Sony needs "better integration between our services and our device
portfolio." Translation: Studio execs and hardware geeks don't talk.
Breaking the silos is probably the hardest task Stringer faces. The Sony factions are as wily as
they come.’
• Business Week, March 21st 2005

• Did he succeed?
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Strategy blown off-course at Sony?
Internal or external factors?
• ‘I am addressing you all today at a significant turning point in the history of Sony. The fiscal
year ended March 31, 2009 (fiscal year 2008) saw unprecedented economic turmoil the likes
of which we could not have imagined just one year earlier. The global economic crisis,
combined with the pronounced strength of the yen, significantly impaired the health of our
operating results-and those of many other companies-with a speed and ferocity that were
unparalleled in recent history. This impact put us in an unsettling financial situation and gave
me, and many of you, rightful cause for concern.
Despite the challenging nature of the past fiscal year, the global economic crisis has presented
us with an opportunity to re-position ourselves to take on our competitors and be poised to
capitalize when the economy turns around. Before I discuss that, however, I would like to
mention some of the highlights of fiscal year 2008, which demonstrate what Sony is capable of
achieving even in adverse economic situations and serve as beacons of inspiration during these
tough times.’
From Sony’s 2009 Annual Report
NB/Recall that strategy has to be developed and implemented in the specific context of the
external environment. For Sony this seems to be unfavourable.
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The roots of competitive advantage: a fresh look?

• ‘In the short run, a company’s competitiveness derives from the price/
performance attributes of current products. But the survivors of the first wave of
global competition, Western and Japanese alike, are all converging on similar and
formidable standards for product cost and quality – minimum hurdles for
continued competition, but less and less important as sources of differential
advantage. In the long run, competitiveness derives from an ability to build, at
lower cost and more speedily than competitors, the core competencies that
spawn unanticipated products. The real sources of advantage are to be found in
management’s ability to consolidate corporate-wide technologies and production
skills into competencies that empower individual businesses to adapt quickly to
changing opportunities’
• Prahalad & Hamel (1990) ‘The core competence of the corporation’ Harvard
Business Review 18
Management
• The functions of management consist of five
basic activities: planning, organizing, motivating,
staffing, and controlling.
• These activities are important to assess in
strategic planning because an organization
should continually capitalize on its management
strengths and improve on its management
weaknesses.

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The Basic Functions of Management

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Marketing

• Description:
• the process of defining,
anticipating, creating,
and fulfilling customers’
needs and wants for
products and services

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Functions of
Marketing
1) Customer analysis
2) Selling products/services
3) Product and service
planning
4) Pricing/distribution
5) Marketing research
6) Cost benefit analysis
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Marketing • Customer analysis
• the examination and evaluation of
consumer needs, desires, and wants
• involves administering customer
surveys, analyzing consumer
information, evaluating market
positioning strategies, developing
customer profiles, and determining
optimal market segmentation
strategies
• essential in developing an effective
mission statement
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Marketing • Product and service planning
• includes activities such as test
marketing; product and brand
positioning; devising warranties;
packaging; determining product
options, features, style, and quality;
deleting old products; and
providing customer service
• important when a company is
pursuing product development or
diversification
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Marketing • Pricing
• Five major stakeholders affect
pricing decisions: consumers,
governments, suppliers,
distributors, and competitors
• Sometimes an organization
will pursue a forward
integration strategy primarily
to gain better control over
prices charged to consumers
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Marketing • Distribution
• includes warehousing, distribution
channels, distribution coverage,
retail site locations, sales
territories, inventory levels and
location, transportation carriers,
wholesaling, and retailing
• especially important when a firm is
striving to implement a market
development or forward
integration strategy
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Marketing
• Marketing research
• the systematic gathering,
recording, and analyzing of
data about problems relating
to the marketing of goods and
services
• can uncover critical strengths
and weaknesses

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 Three steps are 1. compute the
required to perform total costs
a cost/benefit associated with a
analysis: decision
Cost/Benefit
Analysis
2. estimate the 3. compare the
total benefits from total costs with the
the decision total benefits

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How Apple is organized for innovation?
Podolny & Hansen (2020), HBR

https://hbr.org/2020/11/how-apple-is-organized-for-
innovation

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Quiz Group 1 on Thursday 7th October 2021 – course
covered between weeks 1 to 5!
Lecture 12: Balance sheet and financial ratios

The Resource Based View of Strategy

 
Core Reading:
- Prahalad, C K., and Hamel, G ‘The Core Competence of the Corporation’,
Harvard Business Review, May/June, 1990
 
- Grant, R.M. (1991) ‘The resource-based theory of competitive advantage:
implications for strategy formulation’, California Management Review, Spring
1991, pp.114-35. 30
- The reprint of an article by Barney, J. ‘Firm advantages and sustained
competitive advantage’ from the Journal of Management vol.17, no.1 (1991)
pp.99-120).

- Hoopes, D.G., Madsen, T.L., Walker, G. (2003) ‘Why is there a resources-based

view? Toward a theory of competitive heterogeneity’, Strategic Management
Journal, vol.24, issue 10, pp.889-200.

Other resources:

C.K. Prahalad on core competence

http://www.youtube.com/watch?v=WfP-VICbLRA

Jay Barney on resources

http://www.youtube.com/watch?v=-KN81_oYl1s&feature=related
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 Think about other companies and whether a competences
based argument explains strategy (e.g., Samsung talks the
language of RBT but what are its competences?) Amazon,
Vodafone, Ford???

 Relevance for group project/assignment?

 Reminder: Please email names of group members and

company name for your project work!

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