1. 2 Learning Objectives To understand: the characteristics of resources and capabilities that create a foundation for sustainable competitive advantage.

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Learning Objectives

To understand:

• the characteristics of resources and capabilities that create a foundation for sustainable competitive advantage

• how resources are interconnected and the implications of resource interconnectedness for firm performance

• the responsibilities of boards of directors and the agency issues associated with corporate governance

• the usefulness of the value chain in understanding sources of competitive advantage

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StrategicStrategicDirectionDirection

Strategy FormulationStrategy Formulation(corporate and (corporate and business level)business level)

Strategy ImplementationStrategy Implementationand Controland Control

Strategic RestructuringStrategic Restructuring

Internal and External Internal and External AnalysisAnalysis

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Organizational Resources Leading to Sustainable Competitive Advantage

Organizational Resources Leading to Sustainable Competitive Advantage

OrganizationalResources and

Capabilities

Financial

Physical

Human

Knowledge &Learning

Organizational

Valuable?

Unique?

Potential forCompetitiveAdvantage

Appropriatesystemsin place?

Managerstaking

advantageof potential?

RealizedCompetitiveAdvantage

Difficult orcostly toimitate?

No readilyavailable

substitute?

SustainableCompetitiveAdvantage

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Organizational Resource Interconnectedness

Organizational Resource Interconnectedness

Human Resources

Knowledge andLearning Resources

General Organizational

Resources

Physical Resources

Financial Resources

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Human ResourcesHuman Resources

• Managers – CEO and top management team

• Employees – recruitment, training programs,

rewards system

• Owners/board of directors – effective

corporate governance

• Managers – CEO and top management team

• Employees – recruitment, training programs,

rewards system

• Owners/board of directors – effective

corporate governance

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Position of Board of DirectorsPosition of Board of Directors

ShareholdersShareholders

Board ofDirectors

Board ofDirectors

Chief ExecutiveOfficer (CEO)

TopManage-MentTeam

TopManage-MentTeam

VP-LegalVP-Financial VP-MarketingVP-Human Res.

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Corporate GovernanceCorporate Governance

Corporate governance is concerned with the balance between:

•Economic and social goals

•Individual goals of managers and firm goals

The board of directors:

•Hires, fires, supervises and compensates top management

•Approves major strategic decisions

•Ensures that the firm and its managers are acting responsibly

•Provides advice to top management

•Provides a social network that helps firms acquire resources

Corporate governance is concerned with the balance between:

•Economic and social goals

•Individual goals of managers and firm goals

The board of directors:

•Hires, fires, supervises and compensates top management

•Approves major strategic decisions

•Ensures that the firm and its managers are acting responsibly

•Provides advice to top management

•Provides a social network that helps firms acquire resources

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Agency TheoryAgency Theory

• Agents--managers with a fiduciary duty to act in the best interests of owners

• Agency problem--managers maximize their own self-interests at the expense of owners• High salaries of CEOs• Emphasis on short-term performance at expense of long-term

performance• Empire building for status• CEO duality

• Agents--managers with a fiduciary duty to act in the best interests of owners

• Agency problem--managers maximize their own self-interests at the expense of owners• High salaries of CEOs• Emphasis on short-term performance at expense of long-term

performance• Empire building for status• CEO duality

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Physical ResourcesPhysical Resources

• Tangible resources such as machinery, plants

and products – easy to imitate, but the

processes to create them are not

• Locations – competitive clusters can provide

advantages to companies and consumers

• Tangible resources such as machinery, plants

and products – easy to imitate, but the

processes to create them are not

• Locations – competitive clusters can provide

advantages to companies and consumers

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Financial ResourcesFinancial Resources

• Strong cash flow, low levels of debt, strong credit

rating, access to low interest capital and reputation

for creditworthiness can increase strategic flexibility

– more responsive to new opportunities

• Locations – competitive clusters can provide

advantages to companies and consumers

• Strong cash flow, low levels of debt, strong credit

rating, access to low interest capital and reputation

for creditworthiness can increase strategic flexibility

– more responsive to new opportunities

• Locations – competitive clusters can provide

advantages to companies and consumers

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Use of Financial Analysis in Strategic Management

Use of Financial Analysis in Strategic Management

• Identify strengths and weaknesses

• Diagnose problems• Declining profitability• Insufficient liquidity• Leverage too high or too low• Internal mismanagement

• Essential comparisons • Firm to competitors• Firm to itself over time

• Identify strengths and weaknesses

• Diagnose problems• Declining profitability• Insufficient liquidity• Leverage too high or too low• Internal mismanagement

• Essential comparisons • Firm to competitors• Firm to itself over time

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Some Commonly Used Ratios Some Commonly Used Ratios• Profitability

• Gross Profit Margin

• Net Profit Margin

• ROA

• ROE

• Liquidity

• Current

• Quick

• Leverage

• Debt to Equity

• Total Debt to Total Assets (Asset Ratio)

• Activity

• Asset Turnover Average Collection Period

• Accounts Receivable Turnover Inventory Turnover

• Profitability

• Gross Profit Margin

• Net Profit Margin

• ROA

• ROE

• Liquidity

• Current

• Quick

• Leverage

• Debt to Equity

• Total Debt to Total Assets (Asset Ratio)

• Activity

• Asset Turnover Average Collection Period

• Accounts Receivable Turnover Inventory Turnover

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Knowledge and Learning ResourcesKnowledge and Learning Resources

Organizational learning leads to strengths in other resource areas. It involves:

•Knowledge creation

•Knowledge retention

•Knowledge sharing

•Knowledge utilization

Two types of knowledge:

•Codified – can be communicated with precision through written means. Typically not a good source of sustainable competitive advantage

•Tacit – difficult to describe with words. Better source of sustainable competitive advantage

Organizational learning leads to strengths in other resource areas. It involves:

•Knowledge creation

•Knowledge retention

•Knowledge sharing

•Knowledge utilization

Two types of knowledge:

•Codified – can be communicated with precision through written means. Typically not a good source of sustainable competitive advantage

•Tacit – difficult to describe with words. Better source of sustainable competitive advantage

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General Organizational ResourcesGeneral Organizational Resources

Some general organizational resources are hard to imitate and are therefore excellent sources of sustainable competitive advantage:

•Organizational reputation

•Corporate brands

•Unique configurations of stakeholder relationships – joint venture, long-term contracts and other types of partnerships and alliances

•Organizational structure and internal systems

•Organizational culture

Some general organizational resources are hard to imitate and are therefore excellent sources of sustainable competitive advantage:

•Organizational reputation

•Corporate brands

•Unique configurations of stakeholder relationships – joint venture, long-term contracts and other types of partnerships and alliances

•Organizational structure and internal systems

•Organizational culture

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The Value ChainThe Value Chain

Primary Activities

•Inbound Logistics

•Operations

•Outbound Logistics

•Marketing and Sales

•Service

Activities that Support the Primary Activities

•Administration

•Technology Development

•Human Resource Development

•Procurement

Primary Activities

•Inbound Logistics

•Operations

•Outbound Logistics

•Marketing and Sales

•Service

Activities that Support the Primary Activities

•Administration

•Technology Development

•Human Resource Development

•Procurement