3-1 Chapter 3 – The Internal Environment. 3-2 The Strategic Management Process Chapter 10 Corporate Governance Chapter 11 Organizational Structure and.

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Chapter 3 –The Internal Environment

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The Strategic Management Process

Chapter 10Corporate

Governance

Chapter 11OrganizationalStructure and

Controls

Chapter 13Strategic

Entrepreneurship

Strategy Implementation

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Agenda1. Creating Competitive Advantage

2. Resources, Capabilities, & Core Competencies

3. Value Chain Analysis

4. Outsourcing

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Creating Competitive AdvantageCore competencies, in combination with product-market positions, are the firm’s most important sources of competitive advantage

The identification of core competencies, in addition to an analysis of the general, industry, and competitor environments, should drive a firm’s selection of strategies

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Analysis Outcomes

Examine opportunities and threats

Examine unique resources, capabilities, and competencies(sustainable competitive advantage)

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Creating ValueBy exploiting their core competencies or competitive advantages, firms create value.

Value is measured by:

Product performance characteristics

Product attributes for which customers are willing to pay

Firms create value by innovatively bundling and leveraging their resources and capabilities.

Superior value Above-average returns

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Creating Competitive AdvantageFirms achieve strategic competitiveness and earn above-average returns when their core competencies are effectively

Acquired

Bundled

Leveraged

Over time, the benefits of any value-creating strategy can be duplicated by competitors

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Creating Competitive AdvantageSustainability of a competitive advantage is a function of

The rate of core competence obsolescence due to environmental changes

The availability of substitutes for the core competence

The difficulty competitors have in duplicating or imitating the core competence

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Agenda1. Creating Competitive Advantage

2. Resources, Capabilities, & Core Competencies

3. Value Chain Analysis

4. Outsourcing

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RBV LogicResources

Are a firm’s assets, including people and the value of its brand name

Are the source of a firm’s capabilities

Alone, do not yield a competitive advantage

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Financial Resources •The firm’s borrowing capacity•The firm’s ability to generate internal funds

•The firm’s formal reporting structure and its formal planning, controlling,and coordinating systems

Physical Resources •Sophistication and location of a firm’s plant and equipment

•Access to raw materials

Technological Resources •Stock of technology, such as patents, trade-marks, copyrights, and trade

secrets

Tangible Resources

Sources: Adapted from Barney, J. B. (1991). “Firm resources and sustained competitive advantage”. Journal of Management, 17: 101; Grant, R. M. (1991). “Contemporary Strategy Analysis”, Cambridge, UK: Blackwell Business: 100-102.

Organizational Resources

Physical Resources

Technological Resources

Financial Resources

Assets that can be seen and quantified

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Intangible Resources

Human Resources • Knowledge• Trust• Managerial capabilities• Organizational routines

Innovation Resources • Ideas

• Scientific capabilities • Capacity to innovate

Reputational Resources • Reputation with customers

• Brand name • Perceptions of product quality,

durability, and reliability • Reputation with suppliers

Innovative Resources

Reputational Resources

Human Resources

Assets that are embedded in routines

Sources: Adapted from Hall, R. (1992).”The strategic analysis of intangible resources”, Strategic Management Journal: 136-139;Grant, R. M. (1991). “Contemporary Strategy Analysis”, Cambridge, UK: Blackwell Business: 100-102.

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Value of Knowledge AssetsAnnual Market Book Ratio of sales value value market to

Company ($ bn) ($ bn) ($ bn) book value

Google 3.2 60.4 2.9 20.8

Genentech 3.9 75.0 6.8 11.0

Yahoo! 3.6 47.9 7.1 6.7

eBay 3.2 42.8 6.7 6.4

Southwest Airlines 6.5 11.7 5.5 2.1

Union Pacific (Railroad)12.2 16.7 12.7 1.3

Note: The data on market valuations are as of May 1, 2005. All other financial data is based on the most recently available balance sheets and income statements.

Ford Motor Company 171.6 16.7 16.0 1.0

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RBV LogicCapabilities

Are the firm’s capacity to deploy resources

Emerge over time through complex interactions among tangible and intangible resources

Often are based on developing, carrying, and exchanging information and knowledge through the firm’s human capital

The foundation of many capabilities lies in:

• The unique skills and knowledge of a firm’s employees

• The functional expertise of those employees

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Functional areas Capabilities Examples of firms

Distribution Effective use of logistics management techniques Wal-Mart

Human resources Motivating, empowering, and retaining employees Microsoft

Management information systems

Effective and efficient control of inventories through point-of-purchase data collection methods

Gillette

Marketing Effective promotion of brand-name products Polo Ralph Lauren

Effective customer service Nordstrom

Innovative merchandising Crate & Barrel

Management Ability to envision the future of clothing Gap

Effective organizational structure PepsiCo

Manufacturing Design and production skills yielding reliable products Komatsu

Product and design quality Gap

Miniaturization of components and products Sony

Research & development Innovative technology Caterpillar

Development of sophisticated elevator control solutions Otis Elevator

Rapid transformation of technology into new products and processes

Chaparral Steel

Digital technology Thomson Computer Electronics

Examples of Firms’ Capabilities

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RBV LogicCore Competencies

Activities that a firm performs especially well compared to competitors

Resources and capabilities that serve as a source of a firm’s competitive advantage:

• Distinguish a company competitively and reflect its personality

• Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities

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Building Competitive Advantage

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Limitations of the RBVRadical environmental changes

RBV helps managers to select strategies and gain sustainable competitive advantage only as industry environment remains fixed

Managerial influence

Imitability paradox: The less costly to develop or acquire resources, the less likely that these resources will result in sustainable competitive advantage

Not all firms able to gain sustainable advantage

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Core RigiditiesNever take for granted that core competencies will continue to provide a source of competitive advantage

All core competencies have the potential to become core rigidities

Core rigidities are former core competencies that now generate inertia and stifle innovation

Determining what the firm can do through continuous and effective analyses of its internal environment increases the likelihood of long-term competitive success

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Agenda1. Creating Competitive Advantage

2. Resources, Capabilities, & Core Competencies

3. Value Chain Analysis

4. Outsourcing

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Value Chain AnalysisAllows the firm to understand the parts of its operations that create value and those that do not

A template that firms use to:

Understand their cost position

Identify multiple means that might be used to facilitate implementation of a chosen business-level strategy

Reminder: To be a source of competitive advantage, a resource or capability must allow the firm:

To perform an activity in a manner that is superior to the way competitors perform it, or

To perform a value-creating activity that competitors cannot complete

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Value Chain Analysis – cont’dPrimary activities involved with:

A product’s physical creation

A product’s sale and distribution to buyers

The product’s service after the sale

Support activities

Provide the support necessary for the primary activities to take place

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The Basic Value Chain

Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Service

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Shows how a product moves from raw-material stage to the final customer

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Primary ActivitiesInbound logistics

Activities used to receive, store, and disseminate inputs to a product (materials handling, warehousing, inventory control, etc.)

Operations

Activities necessary to convert the inputs provided by inbound logistics into final product form (machining, packaging, assembly, etc.)

Outbound logistics

Activities involved with collecting, storing, and physically distributing the product to customers (finished goods warehousing, order processing, etc.)

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Primary Activities – cont’dMarketing and sales

Activities completed to provide means through which customers can purchase products and to induce them to do so (advertising, promotion, distribution channels, etc.)

Service

Activities designed to enhance or maintain a product’s value (repair, training, adjustment, etc.)

→ Each activity should be examined relative to competitors’ abilities and rated as superior, equivalent, or inferior.

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Support ActivitiesProcurement

Activities completed to purchase the inputs needed to produce a firm’s products (raw materials and supplies, machines, laboratory equipment, etc.)

Technological development

Activities completed to improve a firm’s product and the processes used to manufacture it (process equipment, basic research, product design, etc)

Human resource management

Activities involved with recruiting, hiring, training, developing, and compensating all personnel

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Support Activities – cont’dFirm infrastructure

Activities that support the work of the entire value chain (general management, planning, finance, accounting, legal, government relations, etc.)• Effectively and consistently identify external

opportunities and threats• Identify resources and capabilities• Support core competencies

→ Each activity should be examined relative to competitors’ abilities and rated as superior, equivalent, or inferior.

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Agenda1. Creating Competitive Advantage

2. Resources, Capabilities, & Core Competencies

3. Value Chain Analysis

4. Outsourcing

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OutsourcingThe purchase of a value-creating activity from an external supplier

Few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities

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Operations

Marketing and Sales

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A firm may outsource all or only part of one or more primary and/or support activities.

Outsourced activity

Inbound Logistics

Service

Outbound Logistics

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Outsourcing Decisions

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Rationales for Outsourcing

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Rationales for OutsourcingImprove business focus

Lets a company focus on broader business issues by having outside experts handle various operational details

Provide access to world-class capabilities

The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications

Accelerate business re-engineering benefits

Achieves re-engineering benefits more quickly by having outsiders – who have already achieved world-class standards – take over process

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Sharing risks

Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

Freeing resources for other purposes

Redirects efforts from non-core activities toward those that serve customers more effectively

Rationales for Outsourcing – cont’d

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Outsourcing IssuesGreatest value

Outsource only to firms possessing a core competence in terms of performing the primary or supporting the outsourced activity

Evaluating resources and capabilities

Do not outsource activities in which the firm itself can create and capture value

Environmental threats and ongoing tasks

Do not outsource primary and support activities that are used to neutralize environmental threats or to complete necessary organizational tasks

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Outsourcing Issues – cont’dNonstrategic team of resources

Do not outsource capabilities that are critical to the firm’s success, even though the capabilities are not actual sources of competitive advantage

Firm’s knowledge base

Do not outsource activities that stimulate the development of new capabilities and competencies