Assessing firm internal characteristicsUnderstanding how firms differ in their competitive advantages

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Why assess internal characteristics?

• Firms in same industry using same strategies often vary in performance– Not due to industry or strategy– Must be due to individual organizational

differences: resourcedifferences: resource

• Resources not equally distributed across firms

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Overview of internal analysis

• Use the value chain to identify internal potential for creating value

• Explain competitiveness using the resource-based view of the firmbased view of the firm

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Internal analysis

• The resource-based view

– identifies key resources that are potential sources of capabilities

– Sustained competitiveness depends on capabilities that are valuable, rare, difficult to imitate, and non-substitutableare valuable, rare, difficult to imitate, and non-substitutable

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Strategic capability

• Strategic capability is the resources and competences of an organisation needed for it to survive and prosper.

• Resources:– Tangible: physical assets of an organisation such as plant, people and

finance.finance.– Intangible: Non physical assets such as information, reputation, and

knowledge.

Strategic capability

• Competences are the skills and abilities by which resources are deployed effectively through an organisation’s activities and processes.

• Two basic questions:

What are the threshold resources required to support certain strategies?What are the threshold skills necessary for organize resources in order to satisfy the requirements of customers and support certain strategies?

Strategic capabilities and competitive advantage

Unique resources and core competences

• Unique resources are those resources that critically underpin competitive advantage and that others cannot easily imitate or obtain.

• Core competences are the skills and abilities by • Core competences are the skills and abilities by which resources are deployed through an organisation’s activities and processes such to achieve competitive advantage in ways that other cannot imitate or obtain.

Strategic capability: the terminology

Diagnosing strategic capabilitiesAnalyzing resources

Analyzing the Chain ValueUsage of resourcesControl of resources

Obtaining comparisons:Historical analysis

Product portfolio analysisHistorical analysis

Industry normsBenchmarking

analysisSkills and competences

analysis

Identifying key issuesAnalyse weakness and strenghtsDefining core competences and

resources

Cost efficiency

• Managers often refer to the management of cost as as key strategic capability.

• Customer can benefit from cost efficiencies in terms of lower prices or more product features terms of lower prices or more product features for the same price.

Sources of cost efficiency

The experience curve

•Growth is not optional in may markets

•Unit cots should decline year on year as a result of cumulative year as a result of cumulative experience

•First mover advantage can be important

Creating sustainable competitive advantage through resources and capabilities (VRIN framework)

• Value. In order to build a competitive advantage organisations must have capabilities that are of value for its customers.

• Rarity. Competive advantage could also be based on rare competences: for example unique skills developed over time. However the following must me take in account:account:– Ease of transferability (who owns the competence and how

easily transferable is it)– Sustainability (it is dangerours to assume that competences will

remain the same always)– Core ridigities (dificult to change and therefore damaging to the

organisation)

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Creating sustainable competitive advantage through resources and capabilities (VRIN framework)

• Difficult to imitate– Physical uniqueness– Path dependence: series of events occurring at

various junctures in firm’s development– Causal ambiguity: difficulty in precisely identifying

cause-effect relationships of what a firm does and the product it producescause-effect relationships of what a firm does and the product it produces

– Social complexity: interpersonal relations among the employees and managers of a firm, its culture, and its reputation among suppliers and customers

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Creating sustainable competitive advantage through resources and capabilities (VRIN framework)

• Non-substitutable• Limited availability of strategically

equivalent substitutes:– Substitute a similar resource that leads to

same strategysame strategy– Different resources become substitutes for

each other (e.g., Amazon and Barnes and Noble)

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Capabilities and skills of the organization and likely outcomes

¿Are thisSkills

valuable?

¿Are thiscompetences

rare?

¿Are thiscompetences

difficult toimitate?

¿Is the companyorganized in

order to exploitthese

capabilities? Competetiveconsequences

Economicresults

---- ----No NoCompetive

disadvantage

Results below normal

17

No

Yes

Yes

Yes YesYes

Yes

Yes ----

No

CompetitiveParity

CompetitiveAdvantage

SustainableCompetitiveAdvantage

Normalresults

normal

Results above normalResults above normal

Barney & Griffin, 1992 p. 220

Value chain

• Organization as sequential process of activities that create value

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Value chain

• Exists within larger context– Industry supply chain: suppliers, customers,

alliance partners

• Value chain primary activities– Contribute to physical creation of product or – Contribute to physical creation of product or

service– Inbound logistics, operations, outbound logistics,

marketing and sales, service

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Value chain

• Support activities add value1. By themselves or2. Through important relationships with primary

and other support activities– Procurement, technology development, human – Procurement, technology development, human

resource management, general administration

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Inbound logistics

• Receiving, storing, and distributing (within the firm) product inputs

• Materials handling, warehousing, inventory control, vehicle scheduling, returns to supplierssuppliers

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Operations

• Transforming inputs into final form• Machining, packaging, assembly, testing,

printing, facility operations

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Outbound logistics

• Collecting, storing, and distributing product or service to buyers

• Finished goods, warehousing, material handling, delivery vehicle operation, order processing, schedulingprocessing, scheduling

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Marketing and sales

• Purchases of products and services by end users, sales activities by firm members, and inducements to influence the purchases

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Service

• Providing service to enhance or maintain product value

• Installation, repair, training, parts supply, product adjustment

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Procurement

• All activities related to the arrangement for purchasing (not handling) inputs used in the firm’s value chain

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Technology development

• Knowledge, techniques, processes, procedures, and methods used at various stages of the value chain

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Human resource management

• Recruiting, hiring, training, development, and compensation of all types of personnel

• Supports both individual primary and support activities and entire value chain

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General administration

• General management, planning, finance, accounting, legal and government affairs, quality management, information systems

• Typically supports entire value chain rather than individual activitiesthan individual activities

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Interrelationships of the value chain

• Interrelationships exist among value chain activities within and across organizations

• Interrelationships with the firm• Relationships among activities within the firm

and with other organizations (e.g., customers and with other organizations (e.g., customers and suppliers) that are part of the firm’s expanded value chain

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Value chain and service organizations

• Service firms also have operations activities

– Accounting firms: convert records of transactions (inputs) into financial records

– Travel agency: creates itinerary including transportation, accommodations, and activities customized to one’s accommodations, and activities customized to one’s budget and travel dates

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The value network

• The value network is the set of organisational links and relationships that are necessary to create a product or service.

• Organisations needs to be clear about what • Organisations needs to be clear about what activities it ought to undertake itself and which it should not and, perhaps, should outsource.

The value network

Four key issues about the value network

1. Which activities are centrally important to an organisation’s strategic capability and which are less central?

2. Where are the profit pools? Profit pools refers to the different levels of profit available at diferent parts of the value network.

3. To ‘make or buy’ decision for a particular activity or component is 3. To ‘make or buy’ decision for a particular activity or component is therefore critical. This is the outsourcing decision.

4. Partnering. Who might be the best partners int the parts of the value network and what type of relationships are important to develop with each partner?

Activity map

• An activity map tries to show how different activities of an organisation are linked together.

• The aim of activity map is to:• The aim of activity map is to:– Identify the critical success factors– Which of these activities outperform competition

Activity map

Benchmarking

Benchmarking is a systematic process that allows to connect the definition of strategies with the analysis of the industry and competition. It is a method that allows you to:

1) Measure the results of best-in-class’ competitors with respect to the key success factors in the industry. 2) Determine how the best-in-class achieve those results. 3) Use this results as a basis for setting goals and strategies and deploy 3) Use this results as a basis for setting goals and strategies and deploy them in the company.

A rigorous process of benchmarking will ensure that business strategy will provide a superior competitive position regards competition based on the key success factors.

SWOT

• SWOT summarises the key issues from the business environment and the strategic capability of an organisation that are most likely to impact on strategy development.

• The aim is to identify the extent to which strenghts and weaknesses are relevant to, or capable to of dealing with the weaknesses are relevant to, or capable to of dealing with the changes taking place in the business environment.

• A SWOT analysis should help focus discussion on future choices and the extent to which an organisation is capable of supporting theses stratategies.

SWOT Analysis framework

Strenghts

• A firm’s strenghts are its resources and capabilities that can be used as a basis for developing a competitive advantage: Example of such strenghts include:– Patents– Strong brand names– Strong brand names– Good reputation among customers– Cost advantages from propietary know-how– Exclusive access to high grade natural resources– Favorable access to distribution networks

Weaknesses

• The absecence of certain strenghts may be viewed as a weaknesses:

– Lack of patents– Weak brand name and reputation– High cost structure– High cost structure– Lack of access to channels of distribution

• In some cases, a strenght for a company (large amount of manufacturing capacity) can act as the opposite (inflexible to adapt quickly to changes)

Opportunities

• The external environment may reveal new opportunitties for profit and gowth:

– Unfullfiled customer need– Arrival of new technologies– Arrival of new technologies– Loosening of regulations– Removal of international trade barriers

Threats

• Changes in the environment also may present threats to the firm:

– Shifts in consumers tastes away from the firm’s product– Emergence of substitute products– Emergence of substitute products– New regulations– Increased trade barriers

The SWOT/TOWS Matrix

S-O strategies pursue opportunities that are a good fit to the company’s stregnthsW-O strategies overcome weakness to pursue opportunitiesS-T strategies identify ways that the firm can use its strenghts to reduce its vulnerability to external threatsW-T strategies establish a defensive plan to prevent the firm’s weaknesses from making it highly susceptible to external threats.