Session 9 10 Nw

8/4/2019 Session 9 10 Nw

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STRATEGIC CAPABILITY

8/4/2019 Session 9 10 Nw


Model For Elements Of Strategic

Management

THE

ENVIRONMENT

THE STRATEGIC

CAPABILITY

EXPECTATIONS

AND PURPOSE

THE

STRATEGIC

POSITION

STRATEGIC

CHOICES

STRATEGY

INTO ACTION

BUSINESS

LEVEL

STRATEGY

CORPORATELEVEL &

INTERNATIO

NAL

DEVELOPMENT

DI

RECTIONS &

METHODS

ORGANISING

ENABLING

MANAGING

CHANGE

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Strategic Capability

• In this we would cover what is meant by strategic capability and how thiscan contribute to the competitive advantage for the organization.

• The changing environment throws up new challenges and opportunities.However, this also requires changes in the internal strategic capabilities.If these changes are not identified and carried out, the opportunities

would slip away and even the survival of the organization can be in jeopardy.

• This means that, the capabilities should have ‘strategic fit’ to the newopportunities and challenges thrown up by the changing environment.

• The early 21st century is dominated by the struggle of the industries,

commerce and public services to keep pace with the developments in IT.• The companies who could no keep pace with the changes perished. This

gave birth to dot.com boom. The travel and leisure industry had toalmost completely shift to e-business as major portion of businessshifted to e-business.

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Strategic Capability

• The strategic capability has another dimension also. The strategic

capabilities can be stretched to enable company offer new products and

services ahead of competition. It thus creates new opportunities and

gives competitive advantage to the firm.

• At INTEL, this stretching of the strategic capabilities is a continuous

driver of new applications and products and is keeping the company

ahead of the competition. Moore’s Law is true even today.

• The number of transistors packed in a single chip is growing in geometric

proportion and yet there is no visible saturation point for this growth.

•

The next few slides show one of very prime examples of stretching thecapabilities.

• This stretching of capabilities is fundamental of the strategy

development at INTEL. It has given INTEL a competitive advantage and

has been a key driver of growth in the business.

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Advancements In Technology Of

Microprocessors

Processor Transistor countDate of

introductionManufacturer Process Area

Intel 4004 2,300 1971 Intel 10 µm

Intel 8008 3,500 1972 Intel 10 µm

Intel 8080 4,500 1974 Intel 6 μmIntel 8088 29,000 1979 Intel 3 μm

Intel 80286 134,000 1982 Intel 1.5 µm

Intel 80386 275,000 1985 Intel 1.5 µm

Intel 80486 1,180,000 1989 Intel 1 µm

Pentium 3,100,000 1993 Intel 0.8 µm

AMD K5 4,300,000 1996 AMD 0.5 µm

Pentium II 7,500,000 1997 Intel 0.35 µm

AMD K6 8,800,000 1997 AMD 0.35 µm

Pentium III 9,500,000 1999 Intel 0.25 µm

http://en.wikipedia.org/wiki/Intel_4004

http://en.wikipedia.org/wiki/Intel







http://en.wikipedia.org/wiki/Intel_P5

http://en.wikipedia.org/wiki/AMD_K5

http://en.wikipedia.org/wiki/AMD

http://en.wikipedia.org/wiki/Pentium_II


http://en.wikipedia.org/wiki/Pentium_III

http://en.wikipedia.org/wiki/Pentium_III


http://en.wikipedia.org/wiki/Pentium_II

http://en.wikipedia.org/wiki/AMD


http://en.wikipedia.org/wiki/Intel_P5







http://en.wikipedia.org/wiki/Intel


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Advancements In Technology Of

Microprocessors Processor Transistor count

Date of

introductionManufacturer Process Area

AMD K6-III 21,300,000 1999 AMD 0.25 µm

AMD K7 22,000,000 1999 AMD 0.25 µm

Pentium 4 42,000,000 2000 Intel 180 nm

Atom 47,000,000 2008 Intel 45 nm

Barton 54,300,000 2003 AMD 130 nm

AMD K8 105,900,000 2003 AMD 130 nm

Itanium 2 220,000,000 2003 Intel 130 nm

Cell 241,000,000 2006 Sony/IBM/Toshiba

90 nm

Core 2 Duo 291,000,000 2006 Intel 65 nm

AMD K10 463,000,000/758,

000,000[1]2007 AMD 65 nm

Itanium 2 with

9MB cache 592,000,000 2004 Intel 130 nm

Core i7 (Quad) 731,000,000 2008 Intel 45 nm 263 mm²

http://en.wikipedia.org/wiki/AMD_K6-III


http://en.wikipedia.org/wiki/Pentium_4

http://en.wikipedia.org/wiki/Intel_Atom

http://en.wikipedia.org/wiki/Athlon


http://en.wikipedia.org/wiki/Itanium_2

http://en.wikipedia.org/wiki/Cell_(microprocessor)

http://en.wikipedia.org/wiki/Core_2_Duo




http://en.wikipedia.org/wiki/Core_i7

http://en.wikipedia.org/wiki/Core_i7




http://en.wikipedia.org/wiki/Core_2_Duo

http://en.wikipedia.org/wiki/Cell_(microprocessor)



http://en.wikipedia.org/wiki/Athlon

http://en.wikipedia.org/wiki/Intel_Atom

http://en.wikipedia.org/wiki/Pentium_4





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Foundations of Strategic Capabilities

• Definition of Strategic Capability

• Strategic capability can be defined as the adequacy and suitability of theresources and competences of an organization, for it to survive andprosper.

Resources Competences

Threshold resources Threshold competences

Threshold * Tangible

* Intangible

Unique Resources Core Competences

Capabilities for

Competitive * Tangible

Advantage * Intangible

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Resources and competences

• Organization’s resources can be classified into two major categories.These are ‘Tangible’ and ‘Intangible’ resources.

-- Typically the tangible resources are the physical assets of the organizationsuch as plant, labour, finance etc.

-- The intangible resources are non physical assets such as information,

reputation and knowledge.• There is yet another classification of the resources of an organization.

These are:

• Physical Resources – These are defined by physical machines, buildingsor the production capacity of an organization. The nature of theseresources, such as age, condition, capacity and the location would decide

on the use value of these resources.

• Financial Resources – These are capital, cash, debtors and creditors andsuppliers of money e.g. the shareholders, bankers etc.

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Resources and competences

• Human Resources : This includes the number and demographic profile of

people in the organization. The intangible resource of their skills and

knowledge is also likely to be important. This applies both to the

employees and other people in organization’s networks. In knowledge

based economies people do genuinely become the most important and

valuable asset. (IBM Chief’s statement).

• Intellectual Capital : This is an important aspect of intangible resources

of an organization. This includes patents, brands, business systems and

customer databases. There should be no doubt that these intangible

resources have a value. When businesses are sold, part of the value is

‘goodwill’, which is nothing but intellectual capital. In a knowledge basedeconomy intellectual capital is likely to be a major asset of many

organizations.

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Strategic Capability – the Terminology

TERM DEFINITION

Strategic Capability The ability to perform at the level required to survive

and prosper. It is defined by the resources and

competences of the organization.

Threshold Resource The resources needed to meet customers’ minimum

requirements and therefore required to continue to

exist.

Threshold Competences Activities and processes needed to meet customers’

minimum requirements and therefore essential for

survival.

Unique Resources Resources that underpin competitive advantage and aredifficult for competitors to imitate or obtain.

Core Competences Activities that underpin competitive advantage and are

difficult for competitors to imitate or obtain.

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Threshold Capabilities

• Threshold capabilities are those capabilities essential for theorganization to be able to compete in a given market.

• Without these capabilities, an organization is unlikely to be able tosurvive in the market.

• Strategic capability is defined by two factors: i.e. the strategic resources

and the strategic competences.• Both are required, because even if the organization has the strategic

resource but lacks competence to use it, it would be of no use. Forexample if the organization has a powerful brand, but lacks marketingcompetence to exploit it, there would be no benefit.

•

Threshold level of capability would change with time. The environmentalchanges would require different strategic capability in coming years.

• Also due to constant efforts being put in by the organization, thestrategic capability would be constantly improving.

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• One of problems faced with many companies is the redundancy of

capabilities as the changes in business environment takes place.

• For example, the only way to expand business for old banks was to

increase the number of branches. But with internet technology coming

in, the need for opening branches has got reduced. The newer banks

have much higher number of customers supported per branch than the

older branches. When the older banks implement new technologies,

they would find they have a large number of bank branches that are

surplus.

• The same has happened with number of staff with most of the organized

sector companies in India. They hired a large number of staff during

1970s and with implementation of IT and automation, every company

found that they have surplus staff and then had to resort to VRS

schemes.

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• While threshold capabilities are fundamentally important, they do notcreate competitive advantage. It only makes sustenance of theorganization more feasible.

• Competitive advantage is more likely to be created and sustained if theorganization has unique capabilities that the competition cannot

imitate.• Unique resources are those resources that critically underpin

competitive advantage and that others cannot easily obtain or imitate.

• However, having unique resources is not enough to create thecompetitive advantage. It has to be backed by unique competences, sothat the organization utilizes the unique resources effectively to deliverthe competitive advantage.

• This is where the concept of core competence comes, which gives theorganization a competitive advantage.

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Core Competences

• This concept was first put forth by Gary Hamel and C K Prahalad. This

idea was put forth by them in the series of articles written by them in

Harvard Business Review between 1989 and 1993.

• Core competences are the activities and processes through which the

resources are deployed in such a way as to achieve competitive

advantage that others cannot imitate or obtain.

• Generally more sustainable competitive advantage occurs when it is

based on a combination of different resources and competences. Many

times the companies themselves do not know how they are getting the

competitive advantage.

• Competitive advantage obtained thru a single technical competence or

resource can easily be imitated by the competition, and hence generally

does not result in sustainable advantage.

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Cost Efficiency

• Cost efficiency is achieved by the four cost drivers. These are as shown

below:

Cost efficiency

Economies of Scale

Experience

Product/process

designSupply costs

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Importance of Cost Efficiency

• In many markets, being cost efficient is becoming a threshold capability.

This is happening due to two main reasons.

• Customers do not value product features at any price. If the price rises

too high the customers would be willing to sacrifice the value offered by

the new features and go for lower priced products. Therefore the

challenge is to ensure that appropriate level of features are offered

which are valued by customers more than it costs them. (Apple’s failure

with ‘Lisa’ is an example of this.

• The competitive rivalry will continually require the driving down of costs

because, competitors would be trying to reduce the prices to gain

market share. Due to this reason, being cost competitive gives no

competitive advantage. It rather becomes a requirement to survive in

the market.

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Drivers of Cost Efficiency

• Economies of Scale can be an important source of cost advantage. Higher

scale of operation results in amortization of capital cost over a larger

volume resulting in reduced costs. Higher scale also permits a higher

level of automation resulting in further reduction in costs. In many

industries, higher scale of operation also results in lower distribution &

marketing costs.

• Supply Costs influence an organization’s over all cost position. How the

supplier relationships are fostered and maintained can become an

important contributor to sustaining lower supply costs. (Maruti and Tata

Motors examples are there before us). The supply cost becomes of high

importance in industries which have lower value added and theoperation is mainly assembly operation like manufacturing

Refrigerators/automobile etc. Having superior IT systems also helps in

achieving lower supply costs.

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Drivers of Cost Efficiency

• Product/process Design can also influence substantially the cost position

of the organization. Efficiencies gains have been achieved in many

industries by industrial engineering studies at regular intervals. In Japan,

by Kaizen (Continuous improvements), the productivity almost doubles

in 3-4 years time, without any big investment. Regular Value Engineering

studies can also help in reducing the costs substantially. Superior productdesign and manufacturing processes can result in high product reliability

and reduced servicing needs. Canon snatched the market share from

Xerox & Toyota snatched the market share from General Motors due to

these factors alone.

• Experience can also be a key source of cost efficiency. There is alsoevidence that, experience also results in competitive advantage. Many

studies have shown that, there is close relationship between the costs

and the experience.

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The Experience Curve

Unit

Costs

Total Units produced over time

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Capabilities for Sustainable Competitive

Advantage

• For an organization it is not enough just to have capabilities at threshold

level. This only provides the organizations needs for survival. However, if

growth is to be achieved, organizations need sustainable competitive

advantage. Organizations must work out what resources and what

competences to be built up to achieve sustainable competitive

advantage.

• Value of Strategic Capability: The strategic capabilities built must satisfy

the customer needs that the customer values. There is no point in

building the capabilities which do not result in value for the customer.

What customer values also changes with time. What was once very

valuable, may become just desirable frills with passage of time. Trends inwhat customer values needs to be found. This alone can help in creating

the capabilities that the customer values and is willing to pay for.

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Advantage

• Rarity of Strategic Capability : Clearly, competitive advantage cannot beachieved if the strategic capability of an organization is the same asother organization. The strategic capability has to be therefore unique ordistinct and rare, so that, it cannot be imitated by the competition. Forexample, Hindalco is holding captive mines of Bauxite which are

amongst the richest in Aluminum content. This gives Hindalco asustainable competitive advantage.

• Many times building close relationship with the vendors, can result incompetitive advantage.

• Some times having staff with rare experience (e.g. specialist doctors inhealth care industry) can give competitive advantage. (also Ranbaxy

case)

• Winning of Licenses in Govt controlled industries : In many industrieswinning of the licenses gives the company an advantageous position. Incell phone industry winning of air wave spectrum license givessustainable competitive advantage.

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Advantage

• Companies Having Depreciated Plant & Equipment : Some times,

companies with time have their plant and equipment fully depreciated,

resulting in much lower capital recovery costs. This gives them

competitive advantage on a sustainable basis. For example, the

petroleum refineries or large process plants, are very capital intensive

and a major part of processing cost here is the capital cost. In theseindustries, older units have much lower cost due to much lower capital

recovery costs (Depreciation & Interest costs).

• This logic applies to industries where the obsolescence rate of plant and

equipment is low.

• In fact in such industries, the new incumbent would need to pay much

more for the resource creation due to escalation in cost of the plant and

equipment. This enhances further the competitive advantage of the

older player whose plant has got depreciated.

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Robustness of Strategic Capabilities

• It is not straightforward or easy to build strategic capabilities that give

sustainable competitive advantage. This is where the concept of

robustness of strategic capability comes in. Robustness of the strategic

capabilities is high if the strategic capabilities are not imitable.

• It is unusual that competitive advantage would emerge just by the

tangible resource base of the organization as this can be easily imitated

or traded.

• Competitive advantage is more likely to be determined by the way in

which resources are deployed to create competences in the

organizations activities.

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Organizational Knowledge

• Organizational knowledge is the collective and shared experience

accumulated through systems, routines and activities of sharing across

the organization. It is therefore much more than the knowledge of

individuals.

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Diagnosing Strategic Capability

• Besides developing understanding of what the strategic capability is and

what factors help achieve sustainable advantage, it is also necessary to

know where the organization stands as compared to the rest of the

industry or best in class in the industry.

• There are two diagnostic methods for evaluating how we are placed on

the issue of strategic capability.

• The first method is ‘value chain analysis’ and the second measure is

‘benchmarking’.

• Value Chain and Value Network : If the organization is to achieve

competitive advantage by delivering value to the customer, they need to

understand how that value is created or lost. The value chain and value

chain network concepts can be helpful in understanding how value is

created or lost in terms of the activities undertaken by the ornganization.

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The value Chain

• The value chain describes the activities within and around an

organization which together create a product or service. It is the cost of

these activities and the value that they deliver, determines whether best

value products or services are produced and delivered to customer.

• This concept was developed and introduced by Michael Porter in relation

to competitive strategy.

• The next slide shows graphically the value chain in a typical

manufacturing organization. As can be seen the value chain starts with

the Inbound logistics, then covers the operations (mfg), outbound

logistics (finished product dispatch), Marketing and service activities.

• The value chain also has the support activities like Firms Infrastructure,

human resource activities, R&D and IT and Procurement activities. These

indirect support functions also help creation of value for the product.

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Value Chain Within an Organization

Firm Infrastructure

Human Resource Management Margins

R & D and Technology earned

Procurement

Margins

earned

p

Inbound

logisticsOperations

Outbound

logistics

Marketing

& salesService

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Improving Value Chain – Supply side

• Negotiate more favorable prices with suppliers

• Work with suppliers on the design and specifications for what is being

supplied to identify cost savings that will allow them to lower their

prices.

•

Switch to lower priced substitutes.• Collaborate closely with suppliers to identify mutual cost saving

opportunities. (like JIT strategies etc).

• Integrate backward into the business of high cost suppliers to gain

control over the cost of purchased items – Maruti example.

• Try to make up the difference by cutting costs else where in the chain – usually a last resort.

• Create competition amongst suppliers, so that each one is trying to give

you a better price and performance to win the business.

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Improving Value Chain - Channels

• Push distributors and other forward channel entities to reduce their

markups.

• Work closely with forward channel allies to identify win-win

opportunities to reduce costs. (At Voltas we asked suppliers of

Phosphoric acid at > 90% concentration in place of standard supply at

20% concentration. This reduced packing costs – Why spend on packing

water?)

• Change to a more economical distribution strategy. Switch to cheaper

distribution channels.

• Eliminate some of channels if possible (Dell’s case).

• Try to reduce packing and freight costs, by switching over to more

economical/superior mode of transport – Container service.

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Improving Value Chain - Operations

• This requires continuous improvements in the plant and equipment used

for the operations. For example at Tata Steel such upgrading is a

continuous process. With this, even though the plant had started almost

100 years ago, it is one of most efficient steel plants in the world. Tata

steel’s cost of production of steel is lowest in the world.

• It also requires value engineering exercises at periodic intervals to

review entire operation (including design) in terms of creation of value

for the customer.

• It also requires use of TQM and Kaizen to continuously improve the

productivity of the plant.

• It also requires most efficient use of plant & equipment and use of JIT for

reducing the cost of inventories.

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Benchmarking

• Ann organization’s strategic capability ahs also to be assessed in relativeterms since it concerns the ability to meet and beat the competition.There are different ways in which relative performance might beunderstood.

• Generally three types of benchmarking can be done.

• Historic Benchmarking : It is common practice for the organizations tocompare their performance in comparison to previous yearsperformance. This helps them identify significant changes. The danger inthis exercise is that, it can give false feeling of complacency.

• Industry/sector benchmarking : Insights about performance standardscan be had by benchmarking how the industry or the sector is doing ascompared to our organization. Danger in this analysis is that, if the wholeindustry is doing badly or losing out to other industry sector, the analysismay show we doing fine. The real lurking danger due to other industrysector taking over is lost sight of.

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Best in Class Benchmarking

• This follows from the principal ‘why compare with the average’? We

should compare our performance with the best in class performance.

• Shortcomings of industry norms comparison has encouraged

organizations to seek comparisons more widely through the search for

best practices wherever it may be found. The potential for change is

enhanced by benchmarking across industries or sectors.

• The real power of his approach is not just ‘beyond industry/sector’

comparisons. It is concerned with shaking managers out of the mindset

that improvements in performance will be gradual as a result of

incremental changes in resources. It can push managers to try to rewrite

the entire strategy afresh to achieve major breakthroughs. (like BPR).

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Strength and Weaknesses

• The environmental analysis gives us idea about the opportunities and

the threats to the organization.

• In contrast the evaluation of the strategic capabilities and benchmarking

gives us idea about the Strength and Weaknesses.

• One has to build the performance on basis of the strengths and try to

cover the weaknesses. The strengths need to be used to exploit the

opportunities available in the market place.

• Total emerging picture on basis of environmental analysis (opportunity

and Threats) and the strengths and weaknesses arrived by benchmarking

can be summarized in what we call as SWOT analysis.

• In SWOT analysis, the measurement of strength and weaknesses is not in

absolute terms, but it is in comparative terms as to how we stand in

comparison to competition.

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Resource Based View

• The resource based view has been a common interest for managementresearchers and numerous writings could be found for same. A resource-based view of a firm explains its ability to deliver sustainable competitiveadvantage when resources are managed such that their outcomes can notbe imitated by competitors, which ultimately creates a competitive barrier(Mahoney and Pandian 1992 cited by Hooley and Greenley 2005, p. 96 ,Smith and Rupp 2002, p. 48). RBV explains that a firm’s sustainablecompetitive advantage is reached by virtue of unique resources being rare,valuable, inimitable, non-tradable, and non-substitutable, as well as firm-specific (Barney 1999 cited by Finney et al.2004, p. 1722, Makadok 2001,p. 94).

• These authors write about the fact that a firm may reach a sustainablecompetitive advantage through unique resources which it holds, and these

resources cannot be easily bought, transferred, or copied, andsimultaneously, they add value to a firm while being rare. It also highlightsthe fact that not all resources of a firm may contribute to a firm’s sustainablecompetitive advantage. Varying performance between firms is a result of heterogeneity of assets (Lopez 2005, p. 662, Helfat and Peteraf 2003,p. 1004) and RBV is focused on the factors that cause these differences toprevail (Grant 1991, Mahoney and Pandian 1992, [2],[1] cited by Lopez 2005,

p. 662).

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Resource Based View

• Key points of the theory are:• Identify the firm’s potential key resources.

• Evaluate whether these resources fulfill the following criteria(referred to as VRIN ): – Valuable – A resource must enable a firm to employ a value-creating

strategy, by either outperforming its competitors or reduce its ownweaknesses ([1]:p99; [2]:p36). Relevant in this perspective is that thetransaction costs associated with the investment in the resourcecannot be higher than the discounted future rents that flow out of the value-creating strategy (Mahoney and Prahalad, 1992, p370;Conner, 1992, p131).

–

Rare – To be of value, a resource must be rare by definition. In aperfectly competitive strategic factor market for a resource, the priceof the resource will be a reflection of the expected discounted futureabove-average returns (Barney, 1986a, p1232-1233; Dierickx andCool, 1989, p1504;[1]:p100).

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Resource Based View

• In-imitable – If a valuable resource is controlled by only one firm it couldbe a source of a competitive advantage ([1]:p107). This advantage couldbe sustainable if competitors are not able to duplicate this strategic assetperfectly (Peteraf, 1993, p183; Barney, 1986b, p658). The term isolatingmechanism was introduced by Rumelt (1984, p567) to explain why firms

might not be able to imitate a resource to the degree that they are ableto compete with the firm having the valuable resource (Peteraf, 1993,p182-183; Mahoney and Pandian, 1992, p371). An important underlyingfactor of inimitability is causal ambiguity, which occurs if the source fromwhich a firm’s competitive advantage stems is unknown (Peteraf, 1993,p182; Lippman and Rumelt, 1982, p420). If the resource in question isknowledge-based or socially complex, causal ambiguity is more likely tooccur as these types of resources are more likely to be idiosyncratic to thefirm in which it resides (Peteraf, 1993, p183; Mahoney and Pandian, 1992,p365;[1]:p110). Conner and Prahalad go so far as to say knowledge-basedresources are “…the essence of the resource-based perspective” (1996,p477).

http://en.wikipedia.org/w/index.php?title=Isolating_Mechanism&action=edit&redlink=1






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Resource Based View

– Non-substitutable – Even if a resource is rare, potentially value-creating and imperfectly imitable, an equally important aspect is lackof substitutability (Dierickx and Cool, 1989, p1509;[1]:p111). If competitors are able to counter the firm’s value-creating strategywith a substitute, prices are driven down to the point that the price

equals the discounted future rents (Barney, 1986a, p1233; sheikh,1991, p137), resulting in zero economic profits.

• Care for and protect resources that possess these evaluations,because doing so can improve organizational performance (Crook,Ketchen, Combs, and Todd, 2008).

• The VRIN characteristics mentioned are individually necessary, butnot sufficient conditions for a sustained competitive advantage(Dierickx and Cool, 1989, p1506; Priem and Butler, 2001a, p25).Within the framework of the resource-based view, the chain is asstrong as its weakest link and therefore requires the resource todisplay each of the four characteristics to be a possible source of asustainable competitive advantage ([1]:105-107).

http://en.wikipedia.org/wiki/Sufficient_condition



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Session 9 10 Nw

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