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Today: Internal AnalysisAdministrative issuesCurrent EventsChapter 4: Internal ScanningValue Chain AnalysisRCA Records Case AnalysisTeam Assignment
WEBSITE: www.sba.pdx.edu/faculty/stephens/ss.html
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Resources & Capabilities
Strategy From Resource-based Perspective
How do resources create competitive advantage?
Value-Chain Analysis
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Strategic Analysis -Where Do We Stand?
IndustryAnalysi
s
Resources& Capabilities
Strengths &Weaknesses
Opportunities& Threats
Values OfManagement
Values OfStakeholde
rs
StrategyInternalFactors
ExternalFactors
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The Role of Strategy In Business - The Linkage Between Strategy, Resources, & Organization
Position
Resources& Capabilities
Organization
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The Challenges Of Resource-Based Strategy
What Resources Do We Have?
Are They Fully Exploited?
How Else Could We Exploit Our Resources?
What Resources & Capabilities Are We Going To Need In The Future?
How Do We Build Those Resources & Capabilities?
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Resource-Based View
Two Basic assumptions of RBV:
Resource heterogeneity: • Firms possess different bundles of resources
Resource immobility:• Resources are sticky- they are difficult to imitate
and don’t move quickly between firms
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Resource-Based ViewCore competencies = company strengths that competitors cannot easily match or imitate
sources of competitive advantage.
Core competencies arise from: Resources = financial, physical, human, technological, and organizational assets of the firm; tangible resources (land, buildings, plant and equipment); intangible resources (brand names, reputation, patents, and technological or marketing know-how) Capabilities = company's skills at coordinating resources and putting them to productive use; reside in organizational routines (internal processes, structure, culture)
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Some Terminology
Resources• Assets• Inanimate Objects• “Nouns,” “Things”
Capabilities• Skills, Aptitudes• Activities• “Verbs,” “Doing Things”
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Different Types Of ResourcesPhysical Assets
Plant, Equipment, & Real Estate
Financial AssetsCash & Leverage
Human AssetsIndividual Skills & Capabilities
Intangible AssetsBrand Names, Technology, Reputation
Organizational AssetsOrganizational Routines & Team-Embodied Skills
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Example: Walmart
Resources superior store locations
• located in rural or semi-rural areas with little or no direct competition. strong brand reputation
• customers know that prices are extremely low and quality is acceptable. employee loyalty
• lower turnover and thus lower labor costs than competitors.
Capabilities supply chain management ability to motivate workers with a minimum of supervision and controls
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Core CompetenciesCore Competencies
ResourcesResources• Inputs to a firm’s Inputs to a firm’s
production processproduction process
Core CompetenceCore Competence• A strategic capabilityA strategic capability
The source ofThe source of CapabilityCapability• Integration of a Integration of a
team of resourcesteam of resources
Does the capability satisfy Does the capability satisfy the criteria of sustainable the criteria of sustainable competitive advantage?competitive advantage?
YESYES
NONO
CapabilityCapability• A nonstrategic team A nonstrategic team
of resourcesof resources
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Core competenceWhat are the core competencies of these firms?
McDonald’s
Ford Motor
Intel
Coke
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How Do Resources and Capabilities Lead To Competitive Advantage? (VRIO Framework)
ValuableDoes it create “value” for the customer
RareDo other firms have similar resources
Difficult to ImitateUnique Historical Conditions (Southwest Airlines)Special environmental forces
OrganizationAre you organized to take advantage of your resourcesAppropriable: ability of stakeholders to bargain profits away
*Nonsubstitutable Capabilities that do not have strategic equivalents, such as firm-specificknowledge or trust-based relationships
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Profit-Earning Potential Of Resources & Capabilities
Profit-EarningPotential
Magnitudeof Advantage
SustainabilityOf Advantage
Rareness
Value
Imitability
Organization
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But beware!
The harder you make it to imitate a resource, the more likely it is someone will find a substitute for it.
Dell pioneered direct mail/internet based marketing for PCs because it was locked out of the normal distribution channels.
Canon built highly reliable copiers to neutralize Xerox’s advantage of servicing capabilities
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Inertia & Inflexibility -The Darkside of the Resource-based Approach
The Problem of InertiaIsolating mechanisms are almost never permanent. Changes in technology or consumer demand can make them obsolete
Unexpected technological developments or changes in demand allow entrepreneurs to create new competencies
Overcoming These ObstaclesExperimentation & Renewal
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Core Competencies -- Cautions and RemindersCore Competencies -- Cautions and RemindersNever take for granted that core competencies will continue to provide a source of competitive advantageNever take for granted that core competencies will continue to provide a source of competitive advantage
All core competencies have the potential to become Core RigiditiesAll core competencies have the potential to become Core Rigidities
Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment
Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environmentStrategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats
Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats
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A core rigidities story
Through WWII, Coke was it. It had a beautiful product design—the 7oz. Bottle.
Pepsi turned this into a disadvantage—by selling 12 oz. Pepsi—for the same price as Coke.
Coke’s design cost it market share, as “cheap consumers” bought the “better value”
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Vertical Chain of Production in (Branded) Soft Drink Production
Corn Syrup Production (e.g.ADM)
Concentrate Production(PEPSI)
Retail
(e.g. Walmart,7-11)
Fountain Outlets(e.g. Taco Bell)
Bottling(independent franchise bottlers)
Distribution
(Independent franchise bottlers)
Container Production(e.g. Crown Cork & Seal)
Marketing
(Pepsi)
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Identifying A Firm’s Resources & Capabilities Through Value Chain Analysis
What Sequence of Activities Are Involved In Creating Value?
Firm Infrastructure
Human Resource Management
Technology & Product Development
Purchasing& InboundLogistics
ProductionDistributionMarketing& Sales
Service
MA
RG
IN
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The Value Chain
Primary activities = involved in the physical creation of the product, its marketing and delivery to consumers, and after-sales service and support.
Support activities = provide the inputs that allow the primary activities to take place.
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Using Value Chain Analysis To DetermineThe Sources of Competitive Advantage
Beyond simply using a value chain analysis to “map out” the sequence of activities, we need to do the following:
What is the cost structure of each of these activities?
How do we compare with other competitors in each of these areas? What are our strengths and weaknesses?
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Value Chain AnalysisStep 1. Disaggregate the firm into separate activities.
Step 2. Identify the resources and capabilities associated with each activity.
Step 3. Assess resources and capabilities in terms of their contributions to strategy.
Step 4. Assess linkages across activities.
Step 5. Determine what incremental or revolutionary changes are needed.
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The Value ChainTo gain a competitive advantage over its rivals, a
company must either (1)perform value-creation functions at a lower cost or(2)perform them in a way that leads to differentiation and a
premium price.
Cost Advantage• Technology• Manufacturing• Organization & Culture
Differentiation Advantage• Marketing, Sales & Service• Brand Name Capital• Product Development Organization
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Value Chain Analysis
What Sequence of Activities Are Involved In Creating Value for an organization?
Firm Infrastructure
Human Resource Management
Technology & Product Development
Purchasing& InboundLogistics
ProductionDistributionMarketing& Sales
Service
MA
RG
IN
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Value Chain Analysis of activities
What are the primary activities?What are the support activities?What are company’s core competencies?How should a company reconfigure the value chain to gain a competitive advantage?
Determine the boundaries of the firm (in-house, outsource, or partnership)Vertical and horizontal integrationGeographical location of activities
Develop coordination where linkages are critical. Coherence.
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SWOT AnalysisA simple tool for positioning analysis
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Internal Factors
Strengths
Weaknesses
Let’s apply this to what we know about Southwest Airlines.
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External Factors
Opportunities
Threats
Is it okay to have weaknesses? How can a company mitigate threats?
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Dangers of this tool
Static vs. Trends
Strategic fit
Distinct competence vs. competitive
advantage
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The Internal EnvironmentThe Strengths and Weakness of the Firm
A Firm’s Tangible & Intangible Resources combine with Firm’s Capabilities to create Distinctive Competencies
Distinctive Competencies – those activities that a firm performs better than any competing firm
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The Internal Environment
The Strengths and Weakness of the Firm
Sustained Competitive Advantage – firms that possess and exploit costly to imitate, rare, and valuable resources & capabilities in choosing and implementing their strategies may enjoy a period of sustained competitive advantage and above normal economic profit.
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The Internal Environment
The Strengths and Weakness of the Firm
Tangible Resources: manufacturing firm’s property & equipment, R & D firm’s patents, telephone company’s network of wire, cable,
and satellites, …
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The Internal EnvironmentThe Strengths and Weakness of the Firm
Intangible Resources: well-known and trusted brand names, firm’s good reputation, knowledgeable and creative workforce, unifying corporate culture, international firm’s experience with national
governments, visionary leader with strong motivation and
communications skills,…
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The Internal Environment
The Strengths and Weakness of the Firm
CapabilitiesEmerge over time through complex interaction between and among tangible and intangible resources.Become stronger and more valuable strategically through repetition and practice.Skills and knowledge of firm’s employees, including functional expertise (human capital)
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The Internal Environment
The Strengths and Weakness of the Firm
Capabilities
Examples:• Just-in-time (JIT) delivery and well-trained
inventory specialists• Database management systems and effective
market research efforts
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The Internal Environment
Primary ActivitiesInbound LogisticsOperationsOutbound LogisticsMarketing and SalesCustomer Service
Secondary Activities Firm Infrastructure Human Resource
Management Technology Development Procurement
Value Chain AnalysisThe Strengths and Weakness of the Firm
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The Internal Environment
Life Expectancy of Sustained Competitive Advantage
Length of Innovation Cycle the faster the cycle, the easier it is to take away competitive advantageExample: New generation of cameras born about every 10 months
Number of Dimensions of Customer Value the more dimensions, the easier it is for competitors to find ways of eroding competitive advantageExample: An I-beam is an I-beam, but an automobile comes in many shapes, sizes, etc.
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The Internal Environment
Life Expectancy of Sustained Competitive Advantage
Switching Costs Between Rivals: the easier it is to switch, the easier it is to take away competitive advantage
Example: Difficulty in switching between office systems management service providers versus ease of switching between office supplies provider.
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Questions for RCA Records
How are industry changes affecting traditional record companies, new entrants, artists, and retailers?Describe RCA’s business strategy.Where do you envision the music industry in three to five years?What, if anything, should RCA do differently?
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Next Time: Strategic Coherence
Read Chapter 5
Handout on Strategic Coherence
Team Time
Assign American Airlines Case
WEBSITE: www.sba.pdx.edu/faculty/stephens/ss.html