1La Trobe UniversityCORPORATE STRATEGY

MBA PROGRAMLECTURE 3

Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability

Drawn from Hill & JonesStrategic Management - 8TH Edition - Chapter 3

& other contemporary sources of information

In preparing for battle I have always found that plans are useless,

but planning is indispensable.

- Dwight D.Eisenhower

External and Internal Analyses

General

Envi

ronm

ent

General

Environment

Gen

eral

Environment

SocioculturalSociocultural

GlobalGlobal

TechnologicalTechnological

Polit

ical/L

egal

Polit

ical/L

egal

Dem

ogra

phic

Dem

ogra

phic Econom

ic

Economic

IndustryIndustryEnvironmentEnvironment

CompetitorCompetitorEnvironmentEnvironment

By studying the external environment, firms identify what they might choose to domight choose to do

Opportunities and ThreatsOpportunities and Threats

2By studying the internal environment, firms identify what they can docan do

Unique resources, capabilities, and core competencies

(sustainable competitive advantage)

External and Internal Analyses

THE CONTEXT OF INTERNAL ANALYSIS

Global Economy Traditional sources of advantages can be overcome

by competitors international strategies and By the flow of resources throughout the global

economy.

Global Mind-Set The ability to study an internal environment in ways

that are not dependent on the assumptions of a Single country Single culture, or Single context.

THE CONTEXT OF INTERNAL ANALYSIS

Analysis Outcome Understanding how to leverage the firms

bundle of heterogeneous resources and capabilities.

3Challenge of Internal Analysis

How do we effectively manage current core competencies while simultaneously developing new ones?

How do we assemble bundles of resources, capabilities and core competencies to create value for customers?

How do we learn to change rapidly?

Internal Analysis The purpose of internal analysis is to

pinpoint the strengths and weaknesses of the organisation.

It includes assessments of: The firms resources and capabilities Distinctive competencies

Components ofInternal Analysis

Discovering CoreCompetencies

Resources Tangible Intangible

Capabilities

CoreCoreCompetencies

CompetitiveCompetitiveAdvantageAdvantage

Value Creation

Four CriteriaFour Criteriaof Sustainableof SustainableAdvantages

ValuableValuable RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable

ValueChain

Analysis

Outsource

4Internal Analysis

Building and sustaining a competitive advantage requires a company to achieve superior: Efficiency Quality Innovations Responsiveness to Customers

Internal Analysis: Strengths and Weaknesses

Internal analysis + external analysis= Information

Strengths Assets that boost profitability

Weaknesses Liabilities that depress profitability

Key Strategic Leadership Actions: Establishing Balanced Organisational Controls

The Balanced Scorecard A framework used to verify that the firm

has established both strategic and financial controls to assess its performance.

Prevents over-emphasis of financial controls at the expense of strategic controls

5The Balanced Scorecard Developed by Robert Kaplan and

David Norton (1990s) Plan, set goals, and measure success A plan is more important than specific tools An approach that extends beyond financial

measures and incorporates other priorities of the organisation

Links strategic organisational plans and priorities

Kaplan & Norton

The first step Determine the organisations strategic objectives These should be precise and measurable

Curb Vagueness (eg Improve the organisations customer service)

Be Precise (eg Increase respond to customer orders by 33.3% by

completion of the next financial year) Strategic objectives must align with

organisational goals Must align with the organisations Vision and Mission

A Balanced Scorecard Approach

Allows for an increased focus on strategy and results

Aligns strategy with the Organisations Vision and Mission

Identifies the drivers of future performance for current strategic planning

Aligns strategy with human resources

The Balanced Scorecard

6A Balanced Scorecard Approach

Inte

rnal

Pro

cess

Stak

ehol

der

Lear

ning

& G

row

th

Reduce Re-Activities thru ABC/M

Establish Web Based Self Services

Knowledge Management

Human Capital

Improved Returns on Investments

More rapid and accessible services

Leadership Development

Inve

stm

ents

Strategy Mapping

IT InfrastructureFacilities and Fixed Assets

Economic Model

Process

Expand Global Facility Reach

Drivers and outcomes matched against the core competencies of the organisations business model

Strategy Mapping

Customer Growth Customer SatisfactionRetention Rate

Timely Delivery Quality Service Reputation

Customer PerspectiveOutcomes

Drivers

Price

Splitting the Perspective

7Strategy Maps: Communicating the Strategy

Executive consensus and Executive consensus and accountability:accountability:

Building the map eliminates ambiguity and clarifies

responsibility.

Educate and Communicate:Educate and Communicate:

Build awareness and understanding of organisation

strategy across the workforce.

Ensure Alignment:Ensure Alignment:

Each sub-unit and individual link their objectives

to the map.

Promote Transparency:Promote Transparency:

Communicate with and educate constituents, partners,

oversight bodies, and the general public.

Source: Robert S. Kaplan (2004) "Using Balanced Scorecard Technology to Create Strategy-Focused Public Sector Organisations

A Touch of Theory: Career Anchors

Edgar Schein

Most people have two strong career anchors

Our anchor is the "dominant motivator" that guides us into the type of work we want to do.

Technical / Functional Being good at something Will work to become a guru or expert

Edgar Schein

Career Anchors General Managerial

Want to be managers A liking for problem-solving and dealing

with other people Thrive on responsibility Need emotional competence

Autonomy / Independence Primary need to work under their own rules

and steam They avoid standards and prefer to work alone

8 Entrepreneurial Creativity Like to invent things, be creative and, most of all,

to run their own businesses Ownership very important Easily bored

Security / Stability Seek stability and continuity Avoid risks and are generally 'lifers' in their job

Career Anchors

Service / Dedication to a cause Driven by how they can help other people

Pure Challenge Driven by challenge Seek constant stimulation and

difficult problems Will change jobs when bored Career can be very varied

Career Anchors

Lifestyle Focused first on lifestyle and their whole pattern of

living Integrate work and life May take long periods off work

Schein also suggests that it is often mid-life (late 30s and 40s) before an individual's career anchor becomes clear

Also Recall McClellands Theory of Needs

Career Anchors

Source: Schein, Edgar H, (1990). Career Anchors (discovering your real values).

9 Life is short, Life is short, Life is short, the art long, the art long, the art long, opportunity fleeting, opportunity fleeting, opportunity fleeting, experiment treacherous, experiment treacherous, experiment treacherous, judgementjudgementjudgement difficultdifficultdifficult.

HippocratesHippocrates

Shifting the Analysis:From External to the Internal Environment

THE FIRMGoals and ValuesResources andCapabilitiesStructure and Systems

THE INDUSTRYENVIRONMENT

CompetitorsCustomersSuppliers

STRATEGY

TheFirm-Strategy

Interface

TheEnvironment-Strategy

Interface

Shifting the Analysis:From External to the Internal Environment

WHY?WHY? When the external environment is subject to

rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus.

Resources and capabilities are the primary sources of profitability

10

Organisational Capability Architecture

Organisational Capability Architecture

SKILLS &KNOWLEDGE

VALUES & NORMSMANAGERIAL

SYSTEMSTECHNICALSYSTEMS

Source: Dorothy Leonard-Barton Core Capabilities & Core RigiditiesWellsprings of Knowledge: Building and Sustaining the Sources ofInnovation. Robert M Grant: Contemporary Strategy Analysis.

RESOURCESHuman skills & know-how

TechnologyCulture (values, norms)

ManagementSystems

OrganisationStructure

ORGANISATIONAL CAPABILITY

Capabilities, Strategy, Resources, and Competencies

Organisational Capability

Core Competence as a Strategic Capability

Resources Inputs to a firms

production process

Capability A nonstrategic

team or resource

Core Competence A strategic

capability

The source of

Does it satisfy the criteria of sustainable competitive advantage?

Yes

No

Capability An integration of a

team of resources

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ServiceService

Marketing & SalesMarketing & Sales

Outbound LogisticsOutbound Logistics

OperationsOperations

Inbound LogisticsInbound LogisticsFirm

Infra

stru

ctur

eFi

rm In

frast

ruct

ure

Hum

an R

esou

rce

Mgm

t.H

uman

Res

ourc

e M

gmt.

Tech

nolo

gica

l Dev

elop

men

tTe

chno

logi

cal D

evel

opm

ent

Pro

cure

men

tP

rocu

rem

ent

Margi

n Margin

Primary Activities

Supp

ort A

ctiv

ities

The BasicThe BasicValue ChainValue Chain

Margi

n Margin

Primary Activities

Sup

port

Act

iviti

es

Outsourcing

Outsourcing is the purchase of some or all of a value-creating activity from an external supplier

Usually this is because the specialty supplier can provide these functions more efficiently

Service

Marketing & Sales

Outbound LogisticsOutbound Logistics

Operations

Inbound LogisticsFirm

Fi

rm In

frast

ruct

ure

Hum

an R

esou

rce

Mgm

t.

Tech

nolo

gica

l Dev

elop

men

t

Pro

cure

men

t

Competitive Advantage Competitive Advantage

A firms profitability is greater than the average profitability for all firms in its industry.

Sustained Competitive Advantage A firm maintains above average and superior

profitability and profit growth for a number of years.

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Competitive AdvantageHow does Competitive

Advantage emerge?

External sources ofchange e.g.:Changing customer demandChanging pricesTechnological change

Internal sources of change

Resource heterogeneity among firms meansdifferential impact

Some firms faster and more effective in exploiting change

Some firmshave greater creative

and innovativecapability

How profitable a company becomes depends on three basic factors: Value or utility the customer gets from owning the product

Price that a company charges for its products

Costs of creating that product Consumer surplus is the excess utility a

consumer captures beyond the price paid

Competitive Advantage, Value Creation, and Profitability

Basic Principle: the more utility that consumers get from a companys products or services, the more pricing options the organisation has.

Competitive Advantage

COST ADVANTAGE

COST ADVANTAGE

DIFFERENTIATIONADVANTAGE

DIFFERENTIATIONADVANTAGE

COMPETITIVEADVANTAGE

COMPETITIVEADVANTAGE

Similar

product

at lower

cost

from unique product

13

Before PorterBefore Porter..The McKinsey Business System

TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE

A business delivers its products or services sequentially. At each link of the business system, management can choose how to conduct the business.

The Porter Value Chain A business is a chain of activities for

transforming inputs into outputs that customers value including the primary and support activities.

Building Blocks ofCompetitive Advantage

14

Complexity Theory Organisations are complex systems

Human crowds, flocks of birds, ant colonies are also complex systems

They are all systems in which large numbers of independent agents interact

Complexity Theory shows that complex systems display common and predictable patterns of adaptive behaviour

15

Complexity Theory Premise is that there is a hidden order to the

behaviour (and evolution) of complex systems, whether that system is

A national economy An eco-system An organisation A production line

Used in business as a way to encourage innovative thinking and real-time responses to change by allowing business units to self-organise.

Complex adaptive systems have common features

Unpredictability Waves of change are constantly interacting

and re-shaping competitive landscapes

Complexity Theory

16

Self-organisation A key feature of biological and social systems

is their capacity for self-organisation

Similarly to shoals of fish, companies have the capacity to self-organise, adapt to change, and create new structures and systems in the absence of formal authority

Complexity Theory

Self-Organisation For human organisations there are three main

requirements for self-organisation Identity

Organisations need to have an intent that drives the sense-making process within the organisation

Information The medium through which an organisation relates

to its environment The medium through which individuals within the

organisation know how to react to external changes

Relationships Pathways through which information is transformed

into intelligent, co-ordinated action The more access individuals have to one another, the

greater the possibilities for organised activity Appropriate responses to external circumstances,

requires every person to have a wide range of connections to others, with the potential for unplanned connections

Networking!!

Self-Organisation

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Complexity Theory

Inertia and Chaos Evolutionary processes in organisations can

produce three types of outcome Order change is so limited that the systems suffers inertia Disorder changes produce chaotic outcomes Intermediate small changes resulting in power and process

distribution Small and large shifts Most rapid evolutionary adaption

Step back from the day-to-day running of the organisation

Watch for Emergent properties and Organisational patterns

Those conditions or patterns that bring about the best solutions should be preserved whenever possible

Complexity Theory

Complexity Vs Chaos Complexity theory is very similar to

Chaos Theory

Complexity theorists maintain that chaos, by itself, does not account for the coherence of self-organising, complex systems.

There are advantages for systems that evolve to the edge of chaos...ie they know when to stop!

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Analysing Competitive Advantage and Profitability

Competitive Advantage When a companys profitability is greater than the

average of all other companies in the same industry that compete for the same customers

Benchmarking Comparing company performance against that of

competitors and the companys historic performance

The Durability of Competitive Advantage

The durability of a companys competitive advantage over its competitors depends on:

Barriers to Imitation- Making it difficult to copy a companys

distinctive competencies

Capability of Competitors- Strategic commitment- Absorptive capacity

Industry Dynamism- Ability of an industry to change rapidly

Why Companies Fail

When a company loses its competitive advantage, its profitability falls below that of the industry.

It loses the ability to attract and generate resources.

Profit margins and invested capital shrink rapidly.

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CAUTIONS AND REMINDERS

Never 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 former core competencies that now generate inertia and stifle innovation.

CAUTIONS AND REMINDERS

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

Developing a sound andhealthy organisation requiresunderstanding the environmentas much as understanding the organisation.

- Gary HamelManagement Guru & Author