Business Strategy

LO2
 Strategic Capabilities
• Strategic capability refers to a business' ability to
successfully employ competitive strategies that
allow it to survive and increase its value over time.
• While strategic capability does take into account the
strategies a business uses, it focuses on the
organization's assets, resources and market position,
projecting how well it will be able to employ
strategies in the future. There is no single method or
universal metric for measuring or noting strategic
capability.
 McKinsey 7s Model
• McKinsey 7s model is a tool that analyzes
firm’s organizational design by looking at 7 key
internal elements: strategy, structure, systems,
shared values, style, staff and skills, in order to
identify if they are effectively aligned and
allow organization to achieve its objectives.
• The 7S Model specifies seven factors that are
classified into "hard" and "soft" elements.
• Hard elements are easily identified and
influenced by management
• Soft elements are more intangible and
influenced by corporate culture.
Hard elements Soft Elements

Strategy Shared Value

Structure Skills

Systems Style

Staff
• Hard elements are feasible and easy to define or
identify in an organization as they are normally well
documented and seen in the form of tangible
objects or reports such as strategy statements,
corporate plans, organizational charts and other
documents, and the management can directly
influence them.
• Soft elements, on the other hand, can be more
difficult to comprehend, and are less tangible and
more influenced by culture. However, these soft
elements are as important as the hard elements if
the organization is going to be successful.
 Hard Elements
• The strategy is the plan deployed by an organization in order to
remain competitive in its industry and market. An ideal approach
is to establish a long-term strategy that aligns with the other
elements of the model, and clearly communicates what the
organization’s objective and goals are.
• The structure of the organization is made up of its corporate
hierarchy, chain of command, and divisional makeup that outlines
how the operations function and interconnect. In effect, it details
the management configuration and responsibilities of workers.
• Systems of the company refer to the daily procedures, workflow,
and decisions that make up the standard operations within the
organization.
 Soft Elements
• Shared values are the commonly accepted standards and norms within the company
that influence and temper the behavior of the entire staff and management. This
may be detailed in company guidelines presented to the staff. In practice, shared
values relate to the actual accepted behavior within the workplace.
• Skills comprise the talents and capabilities of the organization’s staff and
management, which can determine the types of achievements and work the
company can accomplish. There may come a time when a company assesses its
available skills and decides it must make changes in order to achieve the goals set
forth in its strategy.
• Style speaks to the example and approach that management takes in leading the
company, as well as how this influences performance, productivity, and corporate
culture.
• Staff refers to the personnel of the company, how large the workforce is, where their
motivations reside, as well as how they are trained and prepared to accomplish the
tasks set before them.
 VRIO Framework
• VRIO framework is the tool used to analyze
firm’s internal resources and capabilities to
find out if they can be a source of sustained
competitive advantage.
 Valuable
• First and foremost resources must be valuable. According
to the RBV, resources are seen as valuable when they
enable a firm to implement strategies that improve a firm’s
efficiency and effectiviness by exploiting opportunities or
by mitigating threats. Another way to assess whether a
resource or investment is valuable is by looking at its
Net Present Value (NPV), meaning that the costs invested
in the resource should be lower than the expected future
cash flows discounted back in time. If non of the resources
possessed by a firm are considered valuable, the focal firm
is likely to have a competitive disadvantage.
 Rare
• Secondly, resources must be rare. Resources that can only
be acquired by one or few companies are considered to
be rare. If a certain valuable resource is possessed by a
large amount of players in the industry, each of the
players has a capability to exploit the resource in the
same way, thereby implementing a common strategy that
gives non of the players a competitive advantage. Such a
situation is indicated as competitive parity or competitive
equality. In case a company does possess a large amount
of resources that are valuable and rare, it is likely to have
at least temporary competitive advantage.
 Inimitable
• Although valuable and rare resources may help
companies to engage in strategies that other firms
cannot pursue since the other firms lack the relevant
resources, it is no guarantee for long-term competitive
advantage. It may give the focal company a first-mover
advantage but competitors will probably try to imitate
these resources. Another criteria that resources should
meet is therefore that they should be hard and costly to
imitate or substitute. According to the RBV, resources can
be imperfectly imitable due to a combination of three
reasons:
• Unique historical conditions: choices made in the past influence the options a
company has in the present and future (path-dependency). Similarly, a company
that has located its facilities on what turns out to be a much more valuable
location than initially anticipated, has an imperfectly imitable physical resource.
• Causal ambiguity: causal ambiguity exists when the link between the resources
controlled by the focal company and its sustainable competitive advantage is not
fully understood. Competitors won’t be able to duplicate the focal company,
since they simply don’t know which resources they should imitate.
• Social complexity: if the most important resource of a company is a combination
of the strenght of its social network, interpersonal relations, a company’s culture
and its reputation among both suppliers and customers, it is very hard for
competitors to build an identical social network since it is dependent on so many
different factors.
• If a company’s resources are both valuable,
rare and inimitable due to the reasons
mentioned above, the focal company has a
high potential to gain a competitive advantage
that is sustainable over time. There is however
one more important criteria that needs to be
present within the company.
 Organization
• The resources themselves do not create any advantage for a company if
the company is not organized in way to adequately exploit these resources
and capture the value from them. The focal company therefore needs
the capability to assemble and coordinate resources effectively. Examples
of these organizational components include a company’s formal reporting
structure, strategic planning and budgeting systems, management control
systems and compensation policies. Without the correct organization to
acquire, use and monitor the resources involved, even companies with
valuable, rare and imperfectly imitable resources will not be able to create
a sustainable competitive advantage. When all four resource attributes are
present, a company is save to assume it has a distinctive competence that
can be used as source of sustainable competitive advantage. Below is a
diagrom that sums up the four VRIO attributes and the resulting
advantages the company has in different situations.
VALUE CHAIN ANALYSIS :
 VALUE
 THE VALUE IS THE TOTAL AMOUNT (i.e. TOTAL
REVENUE) THAT BUYERS ARE WILLING TO
PAY FOR A FIRM’S PRODUCTS.
 THE DIFFERENCE BETWEEN THE TOTAL VALUE
(OR REVENUE) AND THE TOTAL COST OF
PERFORMINGALL OF THE FIRM’S ACTIVITIES
PROVIDES THE MARGIN .
 THE VALUE CHAIN IS A TOOL DEVELOPED BY DR.
MICHAEL PORTER(HARVARD BUSINESS
SCHOOL)
 What is the value chain?
 Porter’s definition includes all activities to
design, produce, market, deliver, and support
the product/service.
 The value chain is concentrating on the activities
starting with raw materials till the conversion
into final goods or services.
 Two categories:
 Primary Activities (operations, distribution,
sales)
 Support Activities (R&D, Human Resources)
 TYPES OF VALUE CHAIN:
• Value Chain is categorized into types based
on the type of organizations.

• Manufacturing based.
• Service based.
• Both manufacturing and service based.
 What is value chain analysis?
• Used to identify sources of competitive
advantage
• Specifically:
– Opportunities to secure cost advantages
– Opportunities to create
product/service differentiation
• Includes the value-creating activities of all
industry participants
 Value Chain Model
(FISH BONE DIAGRAM)

SUPPORT Firm Infrastructure (General Management)

ACTIVITIES
Human Resource Management

Technology Development

Procurement

Inbound Ops. Outbound Sales & Service and

Logistics Marketing Support
Logistics

PRIMARY ACTIVITIES
TYPES OF FIRM ACTIVITIES
• Support Activities:
• Primary activities:
Those that merely support
• Those that are involved in the
the primary activities
creation, sale and transfer of
 Human resources
products (including after-sales
(general and
service)
admin.)
 Inbound logistics
 Tech. development
 Operations
 Procurement
 Outbound logistics
 Sales and marketing
 Service and support
PRIMARY ACTIVITIES
 Value Chain Model
from Michael E. Porter’s Competitive Advantage

Firm Infrastructure (General Management)

SUPPORT
Human Resource Management
ACTIVITIES

Technology Development

Procurement

Inbound Operation Outbound Sales & Service and

s Logistics Marketing Support
Logistics

PRIMARY ACTIVITIES
 PRIMARY ACTIVITIES
1.INBOUND LOGISTICS
- CONCERNED WITH RECEIVING, STORING, DISTRIBUTING INPUTS
(e.g. HANDLING OF RAW MATERIALS, WAREHOUSING, INVENTORY
CONTROL)

2. OPERATIONS
- COMPRISE THE TRANSFORMATION OFTHE INPUTS INTO THE
FINAL PRODUCT FORM (E.G. PRODUCTION, ASSEMBLY, AND
PACKAGING)

3. OUTBOUND LOGISTICS
-INVOLVE THE COLLECTING, STORING, AND DISTRIBUTING THE
PRODUCT TO THE BUYERS (e.g. PROCESSING OF ORDERS,
WAREHOUSING OF FINISHED GOODS, AND DELIVERY)
 PRIMARY ACTIVITIES
4.MARKETING AND SALES
-Identification of customer needs and generation of
sales. (e.g. ADVERTISING, PROMOTION, DISTRIBUTION)

5.SERVICE
-INVOLVES HOW TO MAINTAIN THE VALUE OF THEPRODUCT
AFTER IT IS PURCHASED.(e.g. INSTALLATION, REPAIR,
MAINTENANCE, AND TRAINING)
SUPPORT ACTIVITIES
 Value Chain Model
from Michael E. Porter’s Competitive Advantage

SUPPORT
ACTIVITIES
Firm Infrastructure (General Management)

Human Resource Management

Technology Development

Procurem ent

Inbound Ops. Outbound Sales & Service and

Logistics Marketing Support
Logistics

PRIMARY ACTIVITIES
 SUPPORT ACTIVITIES
1.FIRM INFRASTRUCTURE
The activities such as Organization structure, control system,
company culture are categorized under firm infrastructure.
2.HUMAN RESOURCE MANAGEMENT
Involved in recruiting, hiring, training, development and
compensation.
3.TECHNOLOGY DEVELOPMENT
These activities are intended to improve the product and the process,
can occur in many parts of the firm.
4.PROCUREMENT
Concerned with the tasks of purchasing inputs such as
raw materials, equipment, and even labor.
 USES OF VALUE CHAIN
ANALYSIS:
• The sources of the competitive advantage of a firm can be
seen from its discrete activities and how they interact with
one one another.
• The value chain is a tool for systematically examining the
activities of a firm and how they interact with one another
and affect each other’s cost and performance.
• A firm gains a competitive advantage by performing these
activities better or at lower cost than competitors.
• Helps you to stay out of the “No Profit Zone”
• Presents opportunities for integration
• Aligns spending with value processes
 VERTICAL LINKAGES:

• LINKAGES CAN ALSO EXIST OUTSIDE THE FIRM; FOR

INSTANCE THERE IS A LINKAGE BETWEEN A FIRM’S CHAIN
AND THE VALUE CHAIN OF ITS SUPPLIERS AND
CHANNELS.

e.g. THE ACTIVITIES OFTHE RAW MATERIALS SUPPLIERS

AFFECT THE ACTIVITIES OF THE FIRM. SIMILARLY, THE
ACTIVITIES OF THE DISTRIBUTOR ALSO AFFECT THE FIRM.
APPLYING THE VALUE CHAIN TO AN
INDUSTRY

• THE VALUE CHAINS OFTHE DIFFERENT

FIRMS WITHIN AN INDUSTRY VARY FROM
ONE ANOTHER.
• IN FACT, THE DIFFERENCES IN THE VALUE
CHAINS AMONG THE DIFFERENT INDUSTRY
PLAYERS PROVIDE THE SOURCE OF
COMPETITIVE ADVANTAGES BETWEEN THESE
PLAYERS.
 TATA MOTORS
(A Manufacturing Based Company)
 Value Chain & Value System of TATA
motors
Transporters, Convoy Dealer Network,
Drivers Marketing Research
Association Firms, Vehicle
Financing

SAP ,
VCM
Inbound Outbound
Operation Marketing Service
s
Logistic Logistic
s s
SAP , CRM -
DMS

Suppliers ,
Regional Warehouses, Dealer
Contractors
Workshops, Distributors,
TASS

Strategic
Alliances
PRIMARY ACTIVITIES
Inbound Logistics
Long term contract with service provider’s – transporters
and agents.
Personnel at regional offices for over seeing the smooth
transit
of goods.
Transparency and monitoring through deployment of IT –
all transactions through SAP.
DTL (daily transport logistics) supplies for critical high value
items.
Efficient storage facilities – easy storage and retrieval.
Operations
Capital Equipment Manufacturing division – tooling development
capabilities of global standard.
Apprentice Trainee Course – ensuring stable source of skilled manpower.
Kaizen & TPM(total productive management) team – continuous drive
to improve efficiencies.
Automated manufacturing processes.
Distributed manufacturing – Assembly units at South
Africa, Thailand, Bangladesh, Brazil etc.
Maintenance – technical competence.
Capacity Utilization – Mercedes Benz cars make use
of Tata Motors paint shop
facilities.
 Outbound Logistics
Stockyards, all across the country.
Long term contracts with transporter’s – higher volume
of business to transporters ensures competitive price.
Regional Sales Office and Vehicle Dispatch Section linked through
SAP.
 Efficient security system for prevention of any kind of pilferage.
 Marketing & Sales
 Structured approach to understanding the requirements of individual
customers
– QFD’s conducted at regular intervals.
Clear identification of product requirements, leading to development
of innovative products – Tata 207 DI, Tata Ace
Pan India presence and global footprint.
Independent teams for addressing the requirements of institutional customers
– Defense, State Transport Units
Helping to augment the scarce resources – Fiat selling vehicles through Tata
dealerships, in return Tata has access to Fiat’s technology and unutilized capacity.
Quick assessment of the changing market dynamics and consumer preferences
– Tata 407 LCV
Large network of dealers – use of technology (CRM-DMS).
Service
Easy availability of spare parts.
Efficient collection of data from field and communication to
the respective plants.
Pan India presence, as well as global presence.
Large network of workshops – Dealer workshops and TASS.
Training facilities – for dealer end and TASS personnel.
SUPPORT ACTIVITIES
Procurement
E procurement initiative.
Global Sourcing Team – China , a key destination for sourcing
essential items like tires, power steering units etc., Steel
procured
from Belarus
Long term relationships with a stable and loyal pool of
suppliers.
Technology driven procurement – SAP and VCM.
Strategic subsidiaries & JV’s – TACO group of companies , Tata
Cummins
Centralized Strategic Sourcing for key components – FIP’s,
Steel etc.
Group resources – Tata Steel and Tata International .
 Technology Development
Approximately 2% of the annual profits of the company
invested in research and development.
Knowledge portal – helps employees keep abreast with the
latest technologies.
Extensive prototype building and testing facilities.
Strategic partnerships – MDI (France), Fiat etc.
Formal benchmarking process.
“Technology Day” organized across all plant locations.
Human Resource
Vast pool of technically competent engineers and managers.
Focus on development of technical capabilities – Technical
Training Center’s, Alliance with technical Institutes
 Focus on development of managerial capabilities – MTC’s
, TMTC, executive training programs at premier business
schools
 Career advancement schemes – ESS, FTSS
Firm Infrastructure
 Multi – Location facilities
 Strong leadership – under the aegis of Tata
Sons
 Best in class prototype building facilities
 Technology – SAP
 Large product portfolio
 WALLMART
(A Service Based Company)
WALLMART’S VALUE CHAIN